Stock Market Correction Begins

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Correction Is Beginning

Fed gave the market its most dovish presentation possible, yet stocks still fell on Wednesday. That’s a powerful sign stocks are headed lower. This is the correction many have been predicting. 

Specifically, the S&P 500 fell 0.53% on Wednesday which now puts it 1.3% off its bear market high. Crashes of some of the bankrupt stocks new investors were speculating on were signs this run was over. Timelines have been sped up. Instead of it taking a decade to get to a mania like in the 1990s, we had extreme speculation about 3 months after the bottom.

Personally, I’m definitely leaning on the decline in Thursday’s futures market to support the point that the correction is here. 2 small down days don’t mean much. A 3rd down day that’s bigger than the prior 2 is much more significant. We could be at a 4% drawdown quickly. With the market running on momentum, a switch like this is a bad sign. There won’t be many buyers to stop the fall because stocks have gotten so expensive.

Stats On Market Speculation

CNN fear and greed index fell 1 point to 66 which is fear. We’ve been mostly ignoring this data point in my prediction for a decline. And we’ve also been ignoring the AAII index which barely changed this week even though stocks were very overbought. 

Percentage of bulls fell 0.3% to 34.3%. It’s unbelievable that in one of the most euphoric markets ever that the percentage of bulls is 3.7% below average. That’s because people who own stocks are scared valuations are too high. They aren’t selling stocks even though they are bears.

NAAIM index is better because it shows actual positioning. That comes out tomorrow. Percentage of bears fell 0.8% to 38.1%. There are slightly more bears than bulls which is strange. Investment advisor sentiment index by AAII makes more sense as the bull bear spread is 36.3% which is the highest since January. This isn’t an extreme reading, but it’s close. It’s obviously much more of a negative contrarian signal than the individual investor poll.

It’s surprising that the individual poll is less bullish because retail traders are the most bullish people. New Robinhood traders likely aren’t being surveyed. The chart above shows the type of extreme reading you’d expect from one of the most euphoric markets ever. 

As you can see, the percentage of S&P 500 stocks hitting new 12 week highs is at its highest level in over 30 years. Zero stocks are at 12 week lows. The table below is the best explanation of the retail trading bonanza. As you can see, stocks with prices under $2, otherwise known as penny stocks, are up 102.84% since March 31st. These stocks rose the most because they are the most volatile. This likely enticed retail speculators. Retail speculators also played a hand in this action. They are clearly moving some of the bankrupt stocks like Hertz.

Retail traders shifted their attention to Tesla and away from Nikola

On Robinhood, 16,958 new accounts bought TSLA stock. There are 130,780 accounts with Nikola stock in them. Elon Musk sent out an email to employees telling them the firm will focus on the semi-truck. This was a direct blow to Nikola. The fact that a leaked internal email caused Nikola stock to fall 18.46% shows how much of a bubble it is. 

Tesla stock was up 8.97%. Tesla is highly overvalued itself. It’s up 184% from the bottom in March and 12% since its February peak. The stock is above $1000 per share and has a $190 billion market cap which is close to the size of Toyota. If it rises above Toyota, it will be the biggest car company in the world. This has occurred because Tesla is being valued like a tech company while car companies usually have low multiples.

The chart below gives yet another example of the craziness in markets. As you can see, there has been a huge spike in Google searches for the terms ‘day trading’ and ‘call options.’ New investors who don’t know much about trading are researching these terms for the first time. That’s a bad sign. We don’t want weak hands driving the market higher.

The chart below is the final example I’ll give which explains how pervasive this extreme shift towards the weak stocks has been. As you can see, it shows the performance spread between the top 50 most crowded longs and the top 50 crowded shorts. This has been the worst drawdown in this spread ever. To be clear, this means the most hated stocks are doing over 20% better than the most loved longs.

Review Of Wednesday’s Action

Even though the market is in a correction, the Nasdaq hit a record high on Wednesday. That shows how early we are in this decline. Nasdaq was up 0.67%. It is up 13.06% since May 13th. That’s a year’s worth of gains in 1 month. Keep in mind, the Nasdaq started that period very high. It wasn’t as if this was a rally off a bottom. 

On the other hand, the Russell 2000 fell 2.63% as it is down 4.52% in 2 days. Small cap index can quickly go into a correction.This correction may significantly impact tech even though it hasn’t yet. 

CLOU cloud computing ETF is up 11.07% from its top in February and 26.93% year to date. ServiceNow stock was up 3.3% despite its extreme valuation.

Every sector fell except tech which rose 1.69%. 2 worst sectors were energy and financials which fell 4.92% and 3.75%. Financials fell because the Fed was dovish on rates which is bad for the banks. KBW regional bank index was down 6.66%. 

The post Stock Market Correction Begins appeared first on Theo Trade.

Source: First Rebuttal

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