This Was the Biggest Red Flag on an Ugly Day for the Market
Here's what happened both above and under the surface, why it's important and what to expect next.
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On the surface, the action Monday didn’t look that bad. All the indexes had losses but nothing greater than 1% and breadth wasn’t bad with around 4,000 advancers to 5,100 decliners. However, under the surface, there was some very poor action that indicated that there may be more downside to come.
The biggest problem was the blow-off action in speculative small-caps and some of the leading growth names. The biggest red flag was the reversal in Bitcoin and Bitcoin-related stocks, which have been market leaders since the election. In addition, some of the biggest movers, such as Tesla TSLA, AppLovin APP, and Palantir PLTR, hit new highs and then dropped sharply. These intraday turns illustrate an exhaustion of buying power.
There was still a long list of speculative moves in low-priced stocks and "junk" names, but only a handful were near intraday highs at the close. Traders were busy selling into the strength rather than chasing it. While there is still speculation among aggressive retail traders, this is a late-stage action.
One key indication of a market turn is a weak close. The S&P 500 closed at its absolute low for the first time since October 31. The DJIA also closed at its lows but is now in danger of filling the gap created on November 25.
The bottom line is that there was a lot of ugly out there, and there is no reason to be confident that it is over. While there isn’t enough evidence to suggest a deep pullback, it is very clear that many stocks need to reset, consolidate, and make big runs.
The bullish spin on this action is that a period of correction and consolidation at this point would create a strong technical setup for a highly anticipated Santa Claus rally. Many stocks have gotten ahead of themselves and just need to rest.
Another positive is that economic conditions remain robust. This poor action is more about extended technical conditions rather than a shift in macro-economic conditions.
It was a poor day, and more correction is likely needed, but don’t expect it to go too deep.
Have a good evening. I’ll see you Tuesday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
