Wednesday’s trading session might well have been the bears’ first victory of 2013. And believe me, it has been a long time comin’.
So far, this year has been a one-sided bullish onslaught with nary a sign of weakness. Any attempt — and I mean any — of the sellers to gain the upper hand has been rejected and promptly followed with a swift surge to new highs.
Here are three key bearish developments from yesterday that reveal a change in character — at least in the short-run — for the market:
Click to Enlarge 1. Transports finally ran out of gas, closing down 1.54% on the day. After being dead money for the entirety of 2012, The Dow Jones Transportation Index has led the broader market higher, rising virtually every day in January. The recent breakout from the year-long base was just the spark needed to awaken the Index from its slumber. Many traders use the behavior of the transports as an economic indicator of sorts. With the Index chalk full of truckers, shippers and railroad companies, it acts as a barometer of economic health — rising when optimism about the economy abounds and falling when investors fear a slowdown.
Click to Enlarge 2. The small-cap-laden Russell 2000 Index stumbled right out of the gate on Wednesday, eventually closing down 1.15%. The Russell 2000 has been running hot recently, besting the performance of its mid- and large-cap brethren. The relative strength in the land of the little guys is a positive omen for stocks in general, as traders usually only chase the more volatile, risky stocks when confidence is on the rise.
Click to Enlarge 3. The award for the most bearish behavior on Wednesday might go to junk bonds. The SPDR Barclays High Yield Bond ETF (NYSE:JNK) closed down 0.87% on its highest volume since late September. And don’t let the percentage amount of the decline fool you. A 0.87% drop is a veritable drubbing for a bond ETF that moves as little as JNK.
The sharp reversal in junk bonds is yet another warning sign that risk aversion ruled the roost yesterday. Because of their higher yields and riskier nature, junk bonds tend to rally only when optimism abounds and investors expect there is little chance of default. When traders become jittery, junk bonds tend to get jettisoned from portfolios alongside stocks and any other assets associated with the “risk-on” trade.
In light of these bearish developments, caution is warranted in the short-term. A pullback might finally be upon us — or at least a transition to a more choppy environment for a spell.
That said, the broader markets are still in a raging uptrend, so I would treat any type of weakness we see in the coming days as a buying opportunity.
As of this writing, Tyler Craig owned neutral option positions on the Russell 2000 Index.
