If the S&P 500 drops below this level, traders will start to get really worried

FAN Editor

The sell-off: Is there a catalyst for a deeper correction? The S&P is only 3.9 percent from its historic high, but traders are already debating whether there could be a deeper correction coming.

For the moment, the bears have the upper hand. They cite:

1) The surge in wages (up 2.9 percent year-over-year, highest since 2009).

2) A sudden acceleration in bond yields (from 2.5 percent to over 2.8 percent in three weeks), that is already affecting key areas of the market (the Homebuilding ETF (XHB) is down 10 percent in the past week and a half).

3) A dollar that has stabilized and showing signs of strengthening.

4) Investor sentiment that is at multiyear extremes (The BofA Merrill Lynch Bull & Bear indicator is at the highest level since March 2013; the Goldman Bull/Bear Market Indicator is at the highest level in 10 years).

The bulls argue this is no time to panic, that the macro environment is still nearly perfect, and that a “tradeable correction” (market down 5 percent) will bring out plenty of buyers.

Joe Zicherman of Stadium Capital told me that a good placemark is the 50-day moving average in the S&P 500, currently around 2,716, about 50 points below where market is now.

Hitting that would be a decline of about 6 percent from the historic high of 2,872 we hit on Jan. 26th. For everyone who keeps saying they would love to buy the markets 5 percent lower, that’s a good number to keep in mind.

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