If you’ve been keeping an eye on your screens and portfolio holdings (or if you’ve just taken a look), you are probably aware of the current selling capitulation towards small-cap stocks and the technology sector.
The bloodletting on Wall Street has been unabated and, in my view, it has been overdone. I’m not ready to jump in yet, but I would be on additional weakness in the stock market.
In a period of selling capitulation in the stock market, there is minimal regard for the quality of the stock. Sellers rush to the exits and dump everything along the way. I witnessed this on the stock markets in 2000 and again in 2008.
Yes, there is clearly a technical red flag on the growth stock market indices like the Russell 2000 and the NASDAQ. The Russell 2000 broke below its 200-day moving average (MA) last Tuesday, but managed to rally a bit on Thursday. If the buying support emerging continues, we could see the index rally back to its 50-day moving average; albeit, the risk is there in the stock market.
Just the fact that the technology group, which comprises many high-momentum Internet and social media stocks, is down more than 20% from its highs is worrisome. But at the same time, this isn’t really a surprise, given the advances made in 2013 and the previous years in the stock market.
Even with the stock market correction, we continue to see ridiculous valuations with the likes of such stocks as Yelp Inc. (NYSE/YELP), Groupon, Inc. (NASDAQ/GRPN), Facebook, Inc. (NASDAQ/FB), and Twitter, Inc. (NYSE/TWTR), meaning the bloodletting has not stopped, so … Read More
When I’m looking at the screens each day, I notice there’s some selling capitulation occurring that makes me think back to 2000, when the technology stocks imploded.
Now, while I doubt we are seeing a repeat of 14 years ago, you have to wonder about the mad dash to the exits for many of the high-momentum technology stocks along with small-cap stocks. The small-caps are under threat, with the Russell 2000 down nearly eight percent in 2014 so far and close to five percent in April alone. Watch as the index is just above its 200-day moving average (MA).
Chart courtesy of www.StockCharts.com
As I said last week, the fact that the NASDAQ and Russell 2000 have failed to recover their respective 50-day MAs is a red flag, based on my technical analysis. Moreover, the presence of a possible bearish head-and-shoulders formation on the NASDAQ chart is concerning for technology stocks.
The lack of any leadership from technology stocks now, which was so prevalent in 2013, has also hurt the broader stock market.
On the charts, only the S&P 500 is positive in 2014, with a slight advance. All of the key stock indices were negative in April—a month that has historically been positive.
To make matters worse, we are heading into traditionally the worst six-month period for the stock market, from May to October, so it’s not going to get easier anytime soon.
The fact that numerous technology stocks have produced some strong earnings results is encouraging, but the lack of strong follow-through buying is a concern and suggests some exhaustion towards technology stocks.
We also have the uncertainty … Read More
The stock market staged a minor rally last week, but don’t get too excited yet; the buying support was largely triggered by a technically oversold market, rather than solid fundamentals or a fresh catalyst.
What I can say is that investors need to be careful with the high-beta stocks that are extremely volatile at this time and vulnerable to downside selling.
Just because momentum surfaces, it doesn’t mean the risk is dissipating. It’s simply an oversold bounce that could continue or falter again.
The fact that the Dow Jones Industrial Average and S&P 500 recovered their 50-day moving averages (MAs) last Tuesday is positive, but it doesn’t mean the worst is over.
I see the NASDAQ and Russell 2000 were still down more than seven percent as of last Wednesday and below their respective 50-day MAs. In fact, the Russell 2000 is within reach of testing support at its 200-day MA. This time around, we could see a bigger stock market correction, based on my technical analysis.
Until we see some sustained calm return, there could be continued selling pressure in the stock market, especially with the smaller high-beta stocks and large-cap momentum plays.
The most critical point to understand is that you need to preserve your capital base. The reality is that avoiding a loss is just as good as making profits. Imagine letting a losing trade run and before you realize it, the position is down 20%, 30%, or more.
This is especially true with the small-cap stocks. Making up ground following a major downside move is not easy. For instance, say you have a $10.00 stock and … Read More
As all investors know, no two equities march to the same drum. This would then mean that, technically, it should be impossible to predict future returns based on readily available information. However, this might not be entirely true, as it turns out there may be something to be said for some seasonal investing patterns after all.
First off, when it comes to gathering statistics, there’s no better place to look than the stock markets. Monthly price data for equities on the New York Stock Exchange (NYSE) goes back to the early 1900s and data from the other indices goes back to their infancy. So it’s possible to gather objective data and weed out irregularities.
One of the most popular investing seasonal anomalies is the “January effect,” which really runs from late December to at least the end of February. The January effect theorizes that small-cap U.S. stocks have a history of outperforming the S&P 500.
The January effect was first observed by investment banker Sidney B. Wachtel and published in his paper “Certain Observations on Seasonal Movements in Stock Prices,” which appeared in The Journal of Business of the University of Chicago in 1942. In his paper, Wachtel shows that since 1925, small-cap stocks have outperformed the broader market in the month of January. (Source: Wachtel, S.B., “Certain Observations on Seasonal Movements in Stock Prices,” The Journal of Business of the University of Chicago April 1942: 15 (2); 184–193.)
Why is this? Most analysts theorize that tax-loss selling ramps up near the end of the year, when investors sell losing positions. Larger stocks can absorb the hit—but smaller stocks, not … Read More