This week, markets stepped back from split market conditions. Many breadth measures weakened considerably. Small-cap stocks fell into a correction and crude oil a bear market, the first time in more than 200 days for both markets.
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November ended badly for stocks, and December initially picked up where November left off. But stock market performance during December has historically been favorable. This is especially true if we compare the performance during post-election year December to the average performance of all months.
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There has been a spike in 52-week lows on the S&P 500 as trends deteriorate. Crude oil is in a new bear market. We're seeing more evidence of a split market.
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Crude oil has dropped 20% from its peak. This is a relatively quick bear market, and ends a long bull run. Those developments had a tendency to lead to poor future returns in oil, Energy stocks,and the Canadian dollar.
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Ticker XBI (SPDR S&P Biotech ETF) has been beaten down late and is presently almost 35% off its February 2021 high. At this point, sentiment has become overdone to the downside, which may be signaling an opportunity for biotech traders in the months ahead.
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We have recently highlighted many signs of "churning" in the market - a particular type of action that typically marks intermediate to long-term tops for the major stock market averages. The implication is that the nature of the stock market is changing and that investors may need to move beyond index funds and pay closer attention to strategy and security selection.
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Crude oil has dropped 20% from its peak. This is a relatively quick bear market, and ends a long bull run. Those developments had a tendency to lead to poor future returns in oil, Energy stocks,and the Canadian dollar.
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New lows are expanding, and long-term stock trends are weak, triggering a risk-off signal. Similar conditions preceded negative returns from 2-4 weeks later.
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Small-Cap stocks suffered a failed breakout and quick correction. There are too many new lows. Commodity investors should watch the Aussie dollar.
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Only 3 weeks after setting a new high, the small-cap Russell 2000 fell into a correction, more than 10% below its peak. This is its 4th-fastest correction ever. It also ended one of its longest streaks without a correction. Both behaviors tended to lead to more selling.
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Sundial Capital Research is an independent investment research firm dedicated to the application of mass psychology to the financial markets. Sundial publishes the SentimenTrader.com website.
Our focus is not market timing per se, but rather risk management. That may be a distinction without a difference, but it's how we approach the markets. We study signs that suggest it is time to raise or lower market exposure as a function of risk relative to probable reward. It is all about risk-adjusted expectations given existing evidence.
