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What a crazy week for the market. The first three days was very sleepy, but yesterday and today really woke up everyone. We started the week fully invested, and on Wednesday reduced our position to 30% invested, then today we exited fully in the middle of the day.
On Thursday we saw a dramatic drop in the market where the market finally broke out and below its’ most recent trading range. It had been sitting very calmly for about 2 weeks with very little progress on either side, then suddenly we had an aggressive sell off.
Although yesterday caught many investors by surprise, under the surface we have been continuing to see weakness which we notated in our last few end of week emails. This weakness caused us to reduce our exposure (to 30% invested) on Wednesday before the large drop yesterday.
Early in the week we saw a number of leading stocks continue the trend of the past few weeks .. breaking down, we also saw the continuation of larger cap DOW stocks outperforming the smaller more risky stocks.
I can say that Thursday’s decline did not surprise me … we definitely are seeing a growing negative sentiment in all stocks. It appears that large institutions are moving their assets out of riskier smaller cap stocks and in to larger (safer) positions. And I said last week, leading stocks are supposed to lead … and when we see them one by one fall out of favor and not able to recover, usually the larger cap stocks and indexes follow suit shortly after.
In the last two weeks we are also seeing negative market breadth. Looking at a comparison of advancing vs. declining stocks … we see a negative divergence where fewer stocks are advancing than price would imply. I also see the same results looking at up/down volume. Clearly there is more volume on the selling side.
The Russell 2000 index broke key support lines this week and although they recovered those lines today they did so on weak volume.
Today’s action on the other hand, quite honestly surprised me. With such a large break yesterday, I was surprised to see such a strong comeback. I certainly expected a bounce up today since yesterday’s decline was so extreme (hence the reason we waited to exit the market until today instead of yesterday), but was surprised by how strong the bounce was. With that said, leading stocks as a whole are still struggling and the pattern of larger, safer outperforming smaller company’s continues.
I really think the market is getting ready for a much larger correction, but it might not become evident for a few more weeks. I expect to see another bounce up, and unless leading stocks recover their previous leading roles, I expect to see a sharp drop from there.
The data will lead us in or out of the market, but for now we stay in a defensive role.
Hope you have a wonderful and safe weekend.
Resnn Investments, LLC