…With October in the books, our job is to figure out whether the month’s bearish action is the final shakeout before a year-end rally… or the beginning of a bigger drawdown…Here are three charts that are scaring the bejesus out of investors as we enter November.
The comments above and below are excerpts from an article by Greg Guenther (dailyreckoning.com) which may have been enhanced – edited ([ ]) and abridged (…) – by munKNEE.com (Your Key to Making Money!) to provide you with a faster & easier read. Register to receive our bi-weekly Market Intelligence Report newsletter (see sample here , sign up in top right hand corner.)
1. Small Stocks Fall Off a Cliff
We’re always keeping a close eye on small-cap stocks. If smaller companies are performing well, it’s usually an indication that investors are feeling bullish.
A couple of months ago, small-cap and microcap names were finding new life and spanking the major averages – but not anymore. Last Thursday’s big push lower dropped the Russell 2000 small-cap index to three-month lows and four straight days of losses nudged the Russell below a key support level. See for yourself below…
The S&P 500 finished down 1.9% in October. The Russell 2000 dropped 4.8%. That’s not exactly bullish.
2. Biotechs Can’t Bounce
Biotech stocks quietly crept higher in September as the major averages remained trapped in the spin cycle but investors wanted nothing to do with speculative biotech names in October. Like small caps, these former standouts are quickly deteriorating.
As you can see, biotechs rebounded strongly off their post-Brexit lows in June – but all the hard work is beginning to evaporate…Now that the summer strength is gone, though, we’re left watching these speculative names push to three-month lows.
3. Breadth Continues to Deteriorate
When market rallies occur, we want to see broad participation among stocks, not just a few big names driving the gains. Right now, however, we’re seeing just the opposite. Fewer and fewer stocks are in well-defined uptrends – and that ain’t bullish, my friend.
The percentage of stocks in the S&P 500 above their 50-day moving averages has shrunk substantially since the market rocketed off its June lows. Check it out.
At the moment, fewer than 35% of large-cap names are above their respective 50-day moving averages. We’ll need to see a bounce in this indicator before we can put full trust in any market rally.