The Good, the Bad, and The Ugly From the Market’s Retest of the February Lowbry
As our readers ponder the implications of trade wars and the possibility for moderately higher inflation – a circular loop if we ever did see one – we thought we’d evaluate the market’s behavior to see what kind of clues it’s giving us about its health. Before we begin, however, let’s remember that the market testing its February low is a completely normal, if not predictable, outcome of a correction. And the timing of this test, the length of time that has passes between the original low and the test, fits with the historical precedent nearly perfectly. Therefore, we need to be careful to not read too much into this recent bout of weakness unless or until indicators of market health tell us we are dealing with something more sinister.
First off, the good. Not everything in equity land is painting a doomsday picture. Indeed, liquidity sensitive small cap stocks, emerging market stocks, and frontier market stocks are all outperforming United States equities and developed world equities more generally. This is a strong indication that 1) either panic selling has not set in yet, or 2) the overall health of the market is not that bad. Furthermore, stocks are deeply oversold on a short-term basis as measured by the percent of issues above their own 20-day moving average, as shown in the 4th chart below. When stocks get this oversold, they tend to rally at least a bit.