Stocktake: Extended markets pull back in price

Markets were very jittery last week, with S&P 500 falls largely attributed to investors being spooked by hawkish signals from the Federal Reserve.

That’s fair enough, but it’s an incomplete explanation — after soaring 18 per cent in two months, a pullback was arguably overdue. Bespoke Investment notes that prior to the market retreat, more than 70 per cent of stocks were technically overbought — “easily the most extended reading over the last year”.

Bespoke’s data also indicated further near-term weakness was possible. Even after the recent retreat, the S&P500 was still “just barely below” overbought territory. Almost a third of individual stocks remained technically overbought; just 8.6 per cent were oversold.

That meant indices could suffer further declines in the event of any unpleasant surprises, with Bespoke cautioning that truly oversold levels “are much, much lower from here”.

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As it happened, much lower prices weren’t far away. Investors were clearly wrongfooted by Federal Reserve chief Jerome Powell’s hawkish speech at Jackson Hole on Friday. The market mood has shifted again, from greed to fear.