If you woke up this morning, turned on the computer or TV and saw another Texas healthcare worker with Ebola, European markets under siege yet again and our own stock market futures in collapse, you probably did not feel so great. Anxiety? Panic?
As the morning progressed and our stock market opened, your saw an immediate mini panic with the Dow down 370. At the same time, the 10 year treasury note’s yield absolutely and totally collapsed under 2%. That is capitulation in stocks and flight to quality or safety in bonds. Heading to the exits en mass. Throwing the baby out with the bathwater. Choose any cliche you want.
(Side note. Our Global Asset Allocation strategy has owned treasury bonds almost every day this year and today is the first time we are seeing a sell signal in that asset as its price has spiked to unsustainable levels.)
Is this “A” bottom or “THE” bottom or even a bottom. We should know more by the end of the day. If stocks rollover yet again during the afternoon and close below the lows of the morning, the panic is likely to follow through until we see another panic set up. If, however, stocks can hold the morning low and firm throughout the day, even to still close down, that would be a good sign that at least a bounce, if not full fledged rally is here.
The Russell 2000 index of small cap stocks, which has been bludgeoned since July has performed very well this week on a relative basis. And so far today with stocks taking it on the chin early, small caps fought back to unchanged. This is bullish behavior and not typically what we see if stocks were on the verge of additional collapse or even crash. It will be VERY telling to see how the Russell 2000 ends the day.
Besides the small cap stocks, Apple and Netflix have been pillars of relative strength of late. When stocks finally bottom and bounce, I would closely watch these two large caps for leadership.
On the sector front, none have been spared the carnage of the last month with energy being decimated the most, close to the point where they have performed so poorly, it’s actually good going forward. I remain positive on REITs, biotech, transports and semiconductors for now, but that should change with the heightened volatility from day to day and week to week.
I fully expect wild swings today and probably the rest of the week.
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