A post from Dr. Brett Steenbarger this morning reaffirmed some things that I was already thinking regarding where we may be at in the market cycle. The following excerpt is elegant and insightful:
“….the psychological dynamics of market tops differ from those of market bottoms. Stocks make tops when values become sufficiently stretched to the upside that buying interest dries up. In that context, the weakest sectors begin to fall off, breadth wanes, correlations go from lower to higher, and volatility shifts from lower to higher.
Stocks make bottoms when values become sufficiently stretched to the downside that the buying interest of value participants is aroused. This creates a reversal while volatility and correlation are still high, as breadth rebounds strongly.”
Dr. Steenbarger also points out that sector volatility has declined to levels which has historically resulted in negative returns for equities over the next 20 days.
Given that the S&P 500 is once again bumping its head up against major resistance near the 2100 level and the Russell 2000 is also in the thick of a major support/resistance band it is natural to ponder whether we may be in the early stages of this market transition that occurs when buying interest begins to dry up.
The weekly chart of the Russell 2000 shows that we are at an interesting spot on the chart after last week’s rally:
Next week I will be looking to see if price can break above the downtrend line drawn from the June 2015 peak and the 50-week moving average (which has contained price at various times during the last couple of years) OR if price falls back below last week’s open (~$110).
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