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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, 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.
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 its 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.
The post Self-Fulfilling Seasonality... appeared first on Penny Hawk.
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About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.