‘Unprecedented Run-Up’ in Stocks Pauses With S&P 500 Overbought

(Bloomberg) -- U.S. stocks headed to their biggest drop in almost four weeks on the second-to-last trading day of the year as investors booked gains following a steady run higher.

The drop came despite economic data Monday that was better than forecast, with pending home sales climbing for a third time in four months. There wasn’t much corporate news to speak of, nor geopolitical developments that could explain the decline.

But in volume about 30% below the 100-day average, the S&P 500 Index fell as much as 0.7% while the tech-heavy Nasdaq Composite Index retreated 1.1% as one point. The largest technology companies paced declines, with Facebook Inc., Amazon.com Inc. and Google’s parent company among the biggest drags.

Given the recent run-up on stocks, the pullback may have been overdue, and technical indicators showed as much. The S&P 500 on Friday capped its fifth straight weekly increase and has climbed in 11 of the past 12 weeks. The rally has pushed its 14-day relative strength index above 70, a level that often indicates an inflection point where stocks are overbought and poised for a decline. The benchmark for U.S. equities is up 29% this year, set for its best annual performance since 2013.

Here’s what market-watchers are saying:

Kim Forrest, Bokeh Capital Partners LLC founder:

“There is not a whole lot of news today and oddly enough the news has been good, the economic news: November home sales are a bit stronger, PMI is stronger than anticipated. So I’m going to have to use that old saw that says this is some profit taking,” she said in a phone interview. “It pretty much has been this unprecedented run-up and based on all this trade information and even the trade news continues to be positive, right? So I’m just thinking that people are looking at their portfolios, as they should, and maybe selling things that have outperformed to get things back in balance. The other thing is, it’s going to be a light day. Tomorrow will be even lighter so any bit of selling can look worse than it is because there’s not enough people out there participating.”

Quincy Krosby, Prudential Financial Inc. chief market strategist

“It could be just old-fashioned profit taking. The market is at 19-times forward earnings. You expect profit taking at some point. This is a low volume week just like last week was. You may start to see some profit taking, locking in those gains. The market has been technically overbought -- it doesn’t mean the market can’t continue to be overbought. At the end of the year when you’re locking in your gains, you expect to see profit taking. Sometimes it comes in January, sometimes it comes now. It doesn’t mean the bull market is over, it just means locking in gains. Sometimes you can read too much into it and overthink it. If it were something that was really focused on geopolitical concerns, I would see gold and Treasuries getting a bid. I’m not seeing that.”

Matt Maley, an equity strategist at Miller Tabak & Co.:

“The market was getting overbought on a near-term basis. You look at the 14-day RSI, the relative strength index -- that got above 80 on Thursday,” he said. “Volume is low, markets are thin, and nobody wants to buy with a market this overbought. That doesn’t mean it will be a one-day event. We could very easily see a pullback in January and, in fact, we should see one in January, I think. No market moves in a straight line forever and this one’s been moving in a straight line for three months so it’s getting due for a breather. There’s no news and, in fact, if anything they were saying the trade deal would be signed in a week. If anything, it would be positive news. It’s just a matter of people saying, ‘Jeez I’ve got some great profits, do I really need to be buying anything at the very end of the year?’”

Jeff Mills, chief investment officer at Bryn Mawr Trust:

“It may just be purely technical. You had a really large number of stocks trading above their 200-day moving average. The market was technically overbought. We’ve run really far really quickly. In a day where there is a vacuum of data and a lot of people off, you may see a bit of profit taking heading to year end. That’s certainly possible, we’ve had such a big run and we’ve seen so many names trading above their long-term moving average. You may have people cleaning up their books a little bit and making some sales.”

Yousef Abbasi, global market strategist at INTL FCStone:

“It’s usually difficult to put much credence in market moves that we see on December 30th or 31st. The markets are very much in holiday mode -- in terms of news-flow, volume -- and that mindset may linger until January 6th. With that being said, we have a move today that is seeing equities and bonds lower together. We may just be seeing profit-taking in both. However, to me this does indicate the potential for some anxiety over how developed market central banks will think about negative rates in 2020,” he said. “The market has to understand that while central banks will continue to be very accommodative, there may be some agita while markets attempt to figure out how to deal with their negative rate problems.”

To contact the reporters on this story: Vildana Hajric in New York at vhajric1@bloomberg.net;Claire Ballentine in New York at cballentine@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Brendan Walsh, Richard Richtmyer

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