Thursday, December 11, 2014

Fresh Views on Weak Markets

The weakness that has been showing up in stocks picked up yesterday, with SPY (top chart) breaking to multi-day lows.  The middle chart shows breadth specific to stocks in the SPX universe:  it is a composite of the percentages of stocks trading above their 3, 5, 10, and 20-day moving averages (data via Index Indicators).  Note how it tends to top ahead of price and often troughs ahead of market bottoms as well.  For the first time in a while, we've hit an oversold level similar to levels that preceded market lows in early August and mid-October.

Once we expand our look beyond the SPX universe, the picture becomes interesting.  My data show 891 stocks across all exchanges posting fresh monthly lows yesterday.  That compares with 1180 lows the day before and 1007 lows the day before that.  As the bottom chart (IWM) shows, smaller cap shares have not posted multiday lows in the same way that the large caps have.  That is noteworthy, because the smaller caps have been performance laggards since early in the year.

A nice intraday tell for yesterday's weakness was the high correlation across multiple asset classes.  Stocks, the U.S. dollar, oil, and high yield bonds all moved lower in relative concert.  I will be watching closely to see whether those rising macro correlations swamp the divergences that are showing up among stock indexes.  Good trading means sustaining flexibility when evidence is mixed and conviction when evidence lines up. 

Further Reading:  Keeping an Open Mind in Roiling Markets