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The S&P 500 index is trading back below its 50 day moving average after a massive downside reversal day yesterday. There has only been 3 days when the index opened 1.5% or higher and then closed 1.5% or lower. Two of those days happened to occur in October 2008 and the 3rd instance occured in April of this year.

Over the last few weeks I pointed out the significance of the 6880 level (red horizontal line at the top of chart above) and so far its provided solid resistance. With yesterdays bearish close, the S&P 500 has now matched the size of its largest correction since the April lows. Between here and 6440 (as highlighted on the above chart) is the first downside target. If it holds, the uptrend is still in tact. If it fails, a drop down to the 200 day moving average and 38% retrace level seems likely (currently around 6160-6125).

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If the equal weighted S&P 500 is any guide, then the uptrend may be in jeopardy. The biggest decline off the April lows was 5%, but we are down 5.5% as of yesterdays close and getting close to testing the 200 day average.

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And the advance decline line peaked in early September and has been trending lower since. Meaning less participation in each subsequent rally.

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I believe the economy is weaker than we realize. Not enough people have been paying attention to the unusually weak real consumer spending data all year so far. On top of that (or prehaps because of that) the labor market continues to weaken. We got September employment data this week, and although the monthly job gains beat expectations, the prior months were revised lower and the year over year growth rate of the labor market is now just 0.8%. And I suspect current data is even weaker.

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The unemployment rate ticked up to 4.5%, a four year high. By itself this isn’t alarming, as some of this is due to more people entering the labor force and looking for work. But it continues to trend in the wrong direction and the current statistics are most likely weaker. The big question is, how much weaker?!

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Continued claims for unemployment also ticked up to a 4 year high as layoffs continue to mount for a variety of reasons.

The good news for investors is that despite the weakness, earnings for S&P 500 companies continue to impress. Most companies have already reported Q3 results, but 13 megacaps reported results over the last 3 years. 92% beat on EPS, while 69% beat on sales.

The lone earnings miss came from Home Depot, which has now reported below expected earnings results for the 3rd straight quarter. Sales misses came from some of the traditional retail names as they deal with weaker consumer spending.

Nvidia reported beat on both EPS and sales. But if I am to nitpick, the earnings beats have become paultry relative to its recent history. Nvidia beat on EPS by 3.2%, but the market average is 10.1%. Nvidia has now beaten EPS estimates by an amount that is less then the market average for the second straight quarter. However the growth rates are far superior to the market average.

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The 10 year rate continues to hover just north of 4.0% as investors gauge what the Fed will do with the short term rate over the coming months. The USD appears to be firming up, as it spends the last couple days above the 200 day average for the first time since March. A rising dollar reflects some tightening of financial conditions, but not anything unusual in context against the weak year overall.

So is this the beggining of a bigger market selloff? Unfortunately I don’t know the answer to that but I’ve been preparing for some rough seas ahead ever since we hit 6880. I will have more detailed information in my 2026 preview.

I do believe the economy is weaker than we realize. Could the Fed rate cuts be enough to stem the tide? Possibly. Earnings are solid but a lot of good news is already priced in at these valuations. Despite what you hear, valuations do matter eventually. We’ve already had 3 straight years of well above average returns, and there has only been one time that we’ve had 4 straight years of above average returns (mid to late 1990’s. So could it happen? Of course. But its unusual.

We also have some tough seasonality ahead in 2026. The second year of the 4 year presidential cycle has historically been the weakest. More on this to come later.

Based on these and other factors I’ve become more defensive. This is not a market prediction and it doesn’t mean that I’m making major portfolio changes either. I’ve gone from 60% in stocks down to 40%. And I’ve reduced my exposure to the high flying AI names by buying high quality dividend ETF’s (VYM & VIG) along with the equal weighted S&P 500 index fund (RSP) along with exposure to international stocks (VXUS).

I’m willing to accept lower returns if the AI boom continues, for the added protection if by chance the party takes a break. My advice is to remain diversified (even though its hard) and don’t chase.

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