The three major U.S. indexes traded were lower by 1 percent or more Wednesday after news late Tuesday that President Donald Trump allegedly asked recently fired FBI Director James Comey to "let go" of the investigation into former national security advisor Michael Flynn. NBC News confirmed the news with multiple sources with first-hand knowledge of a memo written by Comey.
A senior White House official said the reports were "not a truthful or accurate portrayal of the conversation between the president and Mr. Comey," according to a statement provided to NBC News.
As a result, some traders worried that the latest political developments could prevent Trump's proposed tax reforms, deregulation and infrastructure spending from being implemented.
"If it's delayed that's a problem. That causes a correction. If it's canceled this market is going to go down so hard that we haven't seen anything like it in the last few years," said Ilya Feygin, managing director and senior strategist at WallachBeth Capital.
Policy-sensitive sectors like financials did lead Wednesday's decline. However, most technical analysts noted the magnitude of the drop did not mark the beginning of a significant sell-off yet.
Frank Cappelleri, technical analyst at Nomura Instinet, pointed out in a note that a decline of at least 1 percent in the S&P 500 on Wednesday would only mark the second such drop since the middle of October, despite a barrage of controversial Trump tweets and press remarks.
Cappelleri is watching whether the S&P can hold 2,350. After that, he said the lower end of the March-to-April trading range at 2,322 is another level to watch.
S&P 500 one-month performance
A sell-off from Wednesday's lows to that point would still mark only a 2 percent decline.
From a fundamental standpoint, first-quarter earnings have mostly beat expectations and are tracking for their best quarter of earnings per share growth since 2011. Global growth is also improving.
The major averages remain within 3 percent of their all-time highs and haven't fallen into correction, or more than 10 percent from a recent high, since the beginning of last year.
"For the most part we really do see this contained," said Sameer Samana, global quantitative strategist at Wells Fargo Investment Institute. "If we do get that bigger pullback [to] 2,200, 2,280, from a technical standpoint the trend still looks higher."
Still, "this is not something that's screaming buy either," Samana said. Wells' year-end target is a range between 2,230 and 2,330, slightly lower than Wednesday's levels.
— CNBC's Christine Wang contributed to this report.
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