Another Bad Hair Day

At the beginning of the week, it looked like a rebound in stocks might get underway – and why not? After all, the market is a bit oversold by now. In fact, a number of indexes are oversold quite a bit. But then came Wednesday, and turned into another bad hair day – a really bad one.

A surprised market participant joins the stock market in having a bad hair day.

Photo via pinterest.com

Needless to say, this remains highly unusual market behavior for early January. And this week is an options expiration week to boot, which reminds us that the warning shot in August also happened during an expiration week (plus the Monday following the expiration).

Probably because it is early January and this market behavior is so unusual, there is no real sense of fear yet. There are certainly many scary headlines and bears are becoming increasingly more vocal. For instance, famous bear Albert Edwards of Soc-Gen has just decided he needs to lower his target…quite a bit. In a noteworthy similarity to us, his timing is occasionally off by a few years, but he also has a disconcerting habit of being vindicated at some point down the road.

Said “some point” may be in the process of arriving. On the other hand, there are also still many true believers going on about imminent v-shaped recoveries. In fact, it feels like there are still way too many of those. We note in the meantime that the downside leaders continue to lead to the downside – here are three of them:

The Dow Jones Transportation Average, the Russell 2000 and the NYSE Composite Index have all broken below their August 2015 mini-panic lows – with the breakdown of the former two looking rather decisive by now. Transports and small caps were two of the relative strength leaders of the bull market, while the NYA reflects the broader market. That all of these indexes are now leading the downturn should give one pause

Oversold conditions in term of momentum-type indicators by now close to or at extremes across the board. A bounce should therefore probably soon begin (i.e., within a few days). As we have pointed out on Tuesday, the quality of the next market rebound should be quite informative. It is hard to say though from whence it will begin, as oversold conditions can always become worse in the short term.

The more popular averages and indexes which are more heavily weighted toward reflecting big cap performance are closing in on their August 2015 lows, but haven’t broken below them yet:

Dow Jones Industrial Average, S&P 500 and Nasdaq Composite – weak, but still above their warning shot lows of last August.