Momentum and market psychology are more powerful than fundamentals.
Yesterday’s correction was simply taking back some of the silliness traders priced in as fundamentals were disregarded. Coronavirus is a convenient excuse, but the sell-off should have happened regardless of the news. As we have been stating, when the masses assume there is no risk in being in the stock market, something has to give. And that something is usually a rude awakening in the form of a sharp correction.
A few weeks ago we noted the large long position being amassed by the “asset manager” category of the COT Report. According to the latest CFTC report, Asset Managers were holding just over 1.1 million net-long futures. We’ve noticed any time this group amasses a position in excess of a million contracts, the market gets toppy. In recent occasions, market corrections were relatively substantial.
▪February 2018 – ES dropped 340 points (2975 to 2530) – 11.4%