New All-Time Highs for Indices Were a Bull Trap
Breadth collapses, new lows swamp new highs and the Russell 2000 sits on its 200-day average.
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It was a rough day for investors who were celebrating new highs for the indices on Tuesday. Broad selling hit the market, with breadth under 30% positive and 380 new lows to just 55 new highs. That is a shocking stat for a market that saw three major indices hit new all-time highs the day before.
There was some recovery intraday in the Invesco QQQ Trust (QQQ) and the Roundhill Magnificent Seven ETF (MAGS), but small caps lagged once again, with the iShares Russell 2000 ETF (IWM) down 1.3%. The Russell 2000 is now sitting right at its 200-day simple moving average.
Bear Market Numbers at Index Highs
The internal numbers are even worse. Of the roughly 5,600 stocks tracked by Finviz, about 72% are below their 50-day simple moving average, and 63% are below their 200-day. Those are the sort of numbers you expect to see when the indices are in technical bear markets, not when they are at new highs.
The selling had a bidless quality to it. Stock after stock lost support levels, not because of a burst of panic but because of steady selling with no buyers stepping in. Many of these stocks still have solid fundamentals and attractive valuations, but that isn’t enough to attract buyers right now.
Bonds and Oil Aren’t Driving It
The iShares 20+ Year Treasury Bond ETF (TLT) hit new lows intraday but bounced back after a fairly good auction of 10-year treasury notes. Oil was lower, but that doesn’t seem to be having much impact on the stocks that have been under pressure. The selling in the broad market has taken on a life of its own.
Game Plan
The Russell 2000 at its 200-day moving average is the line to watch. If it holds and buyers start to step in, we have the makings of the oversold bounce that has been setting up. If it breaks on heavy volume, the selling in small caps likely has further to go. I’m not going to guess which one it will be. The price action will tell us.
This is an interesting setup for upcoming earnings, but the big tech names won’t report for about three weeks. The way the action develops during this time frame will have a significant influence on the way the market reacts to the reports.
Until buyers show up, there is no reason to put precious capital to work. Good stocks with strong fundamentals are going down because no one is bidding for them, and that will eventually create opportunity. But the time to act is when the selling dries up, not while it is still in control. Better late than early.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
