Self-Fulfilling Seasonality…
And Just like that, seasonality gets to work.
OK, I always tell you that “one day is a point, two days is a line and three days or more is a trend”, so take this morning’s opening of the markets with a grain of salt, but the Russell 2000 Index just made a move that the bulls should be watching.
You see, the small cap universe of stocks are often the leaders.
In both bull and bear markets, the small caps historically lead the way.
The reason is simple and comes down to one word, risk.
Sure, we like to watch stocks like NVIDIA Corp(NVDA), Amazon Inc. (AMZN) and Alphabet (GOOGL) for signs of whether a bull or bear market is in force.
But in the real world, it’s the Russell 2000 stocks that you should be watching. That’s because there is no other group that represents the market’s appetite for risk better.
Those large-cap technology stocks may as well be money market accounts these days. Investors flock to those names because they represent a “safety trade”.
But the small caps represent the real risk/reward barometer of the market.
And right now, the small caps are flashing warning signs that there’s a storm coming.
You see at this point the September seasonality trend is going to be more of a mind game than anything. And if there’s a group of stocks that is most affected by
Investors have been seasoned to think that September is terrible for stocks, so it’s usually true.
As a data person, I can point to several reasons for the poor performance. Earnings season is over. Fewer headlines. Less economic data. Lower trading volume.
But the bottom line is that there is one clear driver, sentiment.
Investors spent the month of July bidding stocks higher. At the same time, investor sentiment reached extreme levels of optimism and greed.
In fact, CNN’s Fear & Greed Index started rolling over from its extremely high readings in August.
This is the same sentiment that we saw last year, almost within a week. That rollover in sentiment is at the heart of this September’s weakness.
An extreme top in “greed” and optimism always puts the market in jeopardy. Add to that the psychology of the investors seeing the September seasonality phenomenon start to play out and you’ve got a self-fulfilling situation for the market.
Now, understanding that, let’s bring it back to the small-cap Russell 2000 Index (IWM).
The IWM shares produced an ominous signal today.
On Friday, the IWM posted the first close above their 50-day moving average since mid-August. The move was on relatively light volume and in the face of negative momentum from the ETF’s declining 20-day moving average.
To put it simply, the IWM used everything it had to cross that important trendline.
But today, things have changed.
Not only did the IWM reverse to move back below the 50-day, but the small-cap ETF also crossed back below its 20-day low on the same day.
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September 05 2023
