The stock market has had a rough ride lately. After blasting higher in the wake of the Federal Reserve’s latest money-printing operation, risky assets have stumbled on concerns over the fate of Ireland and the other troubled eurozone nations.
Also, concerns over fast-rising inflation in China has many worried that policymakers there will be forced to take drastic action — with big interest rate increases and lending restrictions. This could quickly reverse the speculative fever that has pushed up Chinese stocks and real-estate prices.
As a result, investors have been quietly reducing their exposure to stocks. Breadth measures continue to narrow as fewer and fewer stocks participate in rallies — a sign that buyers are finding fewer and fewer stocks compelling at these prices.
Just look at the stats from Thursday’s big up day: Up volume accounted for 86% of total volume on the NYSE. And only 80% of the volume traded in the S&P 500 components as positive. This wasn’t enough to eclipse the two 90%+ down volume day’s we’ve seen over the past week (Last Friday and Tuesday, respectively).
Jason Goepfert at SentimenTrader has noticed a strange spike in the number of stocks hitting new 52-week lows — up to more than 5% of all issues on the NYSE — despite the fact that the overall market recently set a new 52-week high. This is a sign that investors used the early November rally — driven by the Fed’s “QE2″ announcement — as an opportunity to dump weak stocks rather than buy strong ones.
After crunching the numbers, Goepfert finds that the market’s performance going forward after such an event was not good. In fact, in his words, “it was awful.” Three months after a surge in new lows within 10 days of the S&P 500 hitting a new high, the broad market posted a positive return only 2 out of 15 times, with a median return of -4.1%.
Here’s the kicker: On average, it took stocks a whopping 86 days — about four months — to regain the 52-week high. Along the way, it suffered a maximum loss of -9%.
This is yet more evidence that we’re in the grips of a medium-term market correction. For short ideas, dollar-sensitive issues appear to be the best bet. Emerging market stocks and precious metals look particularly vulnerable. For risk takers, the Direxion Daily Emerging Market 3x Bear (NYSE: EDZ) and the ProShares Ultra Short Silver (NYSE: ZSL) look attractive.
Disclosure: The author does not own or control a position in any company mentioned.
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