By: Chris Rowe — May 19, 2020
This Market Ain't Out of the Woods Yet
After last week's mid-week selloff was "in the books" investors got a breather.
The Dow Jones spent the next three trading sessions (Thursday through yesterday) rising 5.80% while the S&P 500 rose 4.75%. The Nasdaq Composite brought up the rear, but still gained +4.19%.
So let me ask you...
Are we out of the woods?
If you answered Yes! I can only conclude you're a new comer to the "true market". There's more to the market than what the media calls... "the market".
In fact, what we call the "true" market could also be called the "full" market or the "whole" market.
Here's what I mean...
While everyone and his brother (who probably sold his stocks at the bottom on March 23rd) is following the Dow and the S&P...
Things were taking shape inside the market that most people missed -- because they weren't looking for them... because they don't know to look for them.
First, on Wednesday, May 13th, the New York Stock Exchange Bullish Percent Index (BPI), our "granddaddy" of all indicators, made a bearish move by flipping from an 'X' column to an 'O' column.
(Click any image to enlarge)
This is a sign that the stock market is weak over the short term.
(I won't go into detail about the NYSE BPI here. There's a full discussion of this latest BPI move over at www.truemarketinsiders.com/bpi, the free portal we've set up to track this crucial indicator in real time.)
While the "external market" (the Dow, the S&P etc.) was advancing following last week's selloff, we were seeing some serious deterioration in market breadth.
At True Market Insiders we break the market into 45 sectors -- 41 industry groups and 5 international groups. We'll focus only on the international groups here.
To track these sectors we use a proprietary tool from our Premier data program, Sector Prophets Pro.
Every day after the market closes, the data engines in Sector Prophets Pro generate an image displaying how strong the various sectors are. Sectors where Demand is in control (bullish sectors) are shown in blue. Sectors where Supply is in control (bearish sectors) are shown in red.
Here is how market breadth looked after last Tuesday's close, when the selloff was underway...
As you can see, the bulls controlled 18 sectors and the bears controlled 23. (That adds up to 41 -- remember we're leaving out those international groups.)
And here's what market breadth looked like after Friday's close, after the major market averages (the external market) recovered much of their losses...
The bulls (Demand) control just two sectors -- Biomedics Genetics and Precious Metals. That's out of 41 industry groups -- just 5%.
The bears control fully 39 out of 41 groups -- 95%.
(By the way, it's worth pointing out that one of those two groups -- Precious Metals -- is considered a "defensive" sector. It's where investors put their money when they're feeling a bit nervous and "risk off".)
Now, am I ready to "predict" that we'll see the market make another low like the one we saw on March 23rd, when the Dow got as low as 18,213.65?
I am not...
Yesterday the bulls did reclaim a number of sectors. Right now they control 13 of them.
But with so much bearishness spreading through the market, this looks for all the world like a classic set up where the popular indices look strong but are actually very weak.
So what should we look for?
Look for the market to explode higher, eventually... but not before we see a sharp drop first.
Founder, True Market Insiders