Few industries have escaped severe selling pressure

Key points:

• More than 75% of sub-industry groups have declined > 20% from a 252-day high
• Over a 10-session period, more than 70% of sub-industry groups declined > 10%
• After similar bouts of selling pressure in a bear market, stocks tended to bounce in the near term

A potential counter-trend rally after another stretch of selling pressure

This week, the S&P 500 fell to a new cycle low on a closing and intraday basis. Few industries have been spared.

The selling pressure pushed several breadth indicators to new lows (or highs, depending on the series). One of those is the percentage of sub-industry groups down 20% or more from a 252-day high. That exceeded the previous extreme from June.

For only the 18th time since 1929, the percentage of sub-industry groups down 20% or more from a high has exceeded 75%. I screened out repeats by requiring the indicator to fall below 15% before a new alert could occur again.

Similar readings preceded near-term bounces

After this many sub-industries fell into bear markets, the S&P 500 struggled over the next week.

However, a month later, the S&P 500 was higher 71% of the time with a favorable z-score. The two outlier signals occurred in 1937 and 2008. So, cash is king if you think we're about to have a Lehman event. 

An indicator that measures short-term selling pressure

On Monday, more than 70% of sub-industry groups' declined by 10% or more over the past 10 sessions. The short-term selling pressure has now occurred twice, with the other instance triggering on June 16, which marked the low for a powerful multi-month counter-trend rally.

Suppose we combine the two sub-industry group series, using a threshold of 70% for both indicators. In that case, the outlook improves, especially in the near term. A month later, the S&P 500 was higher 77% of the time with an excellent z-score. Once again, a 2008 type of free fall is the risk if you think something is about to break.

What the research tells us...

As we close out the 3rd quarter, stocks continue to struggle as the Federal Reserve tightens financial conditions with one of the most aggressive hiking cycles in history. The selling has pushed several breadth-based indicators to new extremes. After similar bouts of short-term selling pressure within a severe bear market environment, stocks tend to bounce, especially a month later.