Last week was tough for equities: The S&P 500 was down as much as 2.4% in mid-day trading on Friday. With stocks faltering at significant technical resistance, many believe that a retest of prior lows is inevitable — which would mean stocks are in for additional losses of 5% or more despite the market�s rather impressive gains in July.
Another possibility is that buyers are simply taking a timeout. While this seems overly simplistic, there is an important takeaway here. According to the supply and demand measures maintained by Lowry Research, the price declines over the last few days have been the result of a decline in demand rather than a big increase in selling pressure. In other words, instead of a full frontal assault by the short sellers, stocks are falling because buyers decided to take a step back.
I can’t say I blame them. The 14 trading days through Monday — before the recent selloff began — represented the best stretch of performance for stocks since last summer. And much of that gain came within the last six sessions. Breadth improved dramatically as a wide swatch of the market was bid higher. That’s a lot of heavy lifting over a relatively short span. A rest break is in order.
And that’s exactly what the data suggests is happening. Between July 19 and July 26, Lowry’s measure of buying power increased by 46 points or 19% while its measure of selling pressure dropped 44 points or 6.4%. Over the last three days, the measure of buying power has dropped just two points while selling pressure has also fallen by three points. Instead of trying to cause trouble at a time of market vulnerability, the bears are pulling in their claws.
There’s more. Breadth actually improved on Thursday over Wednesday’s session. Net up volume on the NYSE increased to 44% of total up volume while n! et advan cing issues increased from -1,016 to +171. So although price deteriorated over Wednesday’s result, fewer stocks participated in the decline. All of this suggests the bears are either unwilling or unable thus far to mount a serious full-frontal attack on the stock market.
So what we have here is a market that was left vulnerable by buyers stepping away; but the sellers aren’t strong enough to mount an all-out assault. And all the while, medium-term measures of breadth continue to improve. The bulls aren’t finished — they’re just reloading. So expect a few more days of shenanigans before the broad market resumes its upward trend.
Broadly, I’m looking for small-cap stocks and foreign stocks to continue their recent outperformance. The iShares Russell 2000 (NYSE: IWM) and the iShares Emerging Markets (NYSE: EEM) look attractive at these levels. At the sector level, retail and consumer discretionary stocks are perking up as are materials stocks. The Retail SPDR (NYSE: XRT) and Basic Material SPDR (NYSE: XLB) look good. If you’re looking for individual stocks, be sure to check out Sears Holding (NYSE: SHLD).�
As of this writing, Anthony Mirhaydari did not own a position in any of the stocks named here.
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