The U.S. equity markets have had a lot to digest

After declining nearly 20% on a closing basis through 12/24/18, the S&P 500 set a new all-time high on April 23, 2019, thus concluding the deep correction that started on September 20.

It then reached an even loftier peak on the final day of the month. Yet in perfect timing with the start of the seasonally weak “Sell in May” period, stocks began to digest these gains.

The first trigger was when Fed Chair Jerome Powell threw cold water on investors’ belief that the FOMC would soon begin a new rate-cutting cycle. Then the water torture continued when the ante was upped ahead of the trade discussion between the U.S. and China. As a result, the S&P 500 slipped a shade more than 2% through May 10, accompanied by 10 of 11 sectors and nearly 80% of the 146 sub-industries within the S&P Composite 1500. Now only 53% of these sub-industries are trading above their 50-day (10-week) moving averages vs. 85% less than a month ago.

Despite Friday’s bounce, investors wonder if the markets have further to fall. Likely so, as the percentage of sub-industries trading above their 10-week averages has typically fallen below 33% before beginning to indicate that the earlier excesses have been worked off. In addition, a first-order Fibonacci retrenchment (23.6%) of the recovery since Christmas Eve would imply a setback to around 2805 on the S&P 500, while a 38.2% retrenchment points to a near-8% pullback.

Yet since we see a trade accord being reached in the not-too-distant future, we don’t expect the market to endure more than a short-lived spate of indigestion.