Larry’s Note: At The Dollar Trap emergency briefing on Wednesday night, Jeff Brown and I will share why the U.S. dollar is in a trap that’s mathematically inescapable… and why not even the president himself can stop it from snapping shut.
We’ll also show why the winners of the AI boom could effectively lose up to 40% of their gains in the aftermath… and how you can turn this chaos into profits if you know how to tackle it.
If you haven’t yet signed up to attend, don’t worry. You can add your name to the list with one click right here.
Major market indexes are trading like investors don’t have anything to worry about. But that’s not the message from the average stock.
Despite the S&P 500 and Nasdaq hovering within a couple of percent of the all-time highs, there’s been a sharp pullback under the hood.
The market’s biggest stocks are propping up the capitalization-weighted indexes. After all, the top 10 stocks by weight in the S&P 500 make up nearly 40% of the index. And the “Magnificent 7” jumped to new record highs last week.
So things look calm on the surface. Yet most stocks are dropping on rising concerns – everything from Fed rate hikes, soaring bond yields, jumping energy prices, and rising inflation.
At the same time, the pullback in some sectors is going too far. That’s setting up a mean reversion rally in the market’s most beaten-up stocks…
Brownstone Research founder Jeff Brown and hedge fund “Market Wizard” Larry Benedict are holding an emergency broadcast on Wednesday, September 30 at 8 p.m. ET. They believe an event scheduled by Washington could gut the biggest winners of the AI boom. They’re talking about potential losses of up to 40%… Yet for the prepared, it could be the opportunity of a lifetime. Click here to learn more.
An email announcing a new 401(k) investment option is coming to 70 million inboxes. Most will delete it – and miss what Larry Benedict calls the decade’s biggest opportunity. He’s naming the one ticker to own before it arrives – free. Watch here.
Stock market breadth is how you track participation in a trend. You want to see broad participation in a rally.
But recent evidence points to the exact opposite right now.
There are lots of ways to track breadth. That could be the number of stocks making new highs versus new lows, advancing securities compared to decliners, or the percent of stocks trading above a key moving average.
Lately, several metrics point to a worsening pullback in the average stock. For instance, new 52-week lows have outnumbered new 52-week highs across major exchanges every day since late August.
But growing evidence suggests that the pullback in the average stock has gone too far. That could set up a mean reversion trading opportunity.
Just look at the percentage of stocks across the market trading above their 20-day moving average (MA). That’s a good way of tracking how many stocks are trading in short-term uptrends. Here’s the chart:
The percent of stocks across major exchanges trading above their 20-day MA dropped to 25% recently. Extensions below 30% are rare – this has happened only one other time this year, back in March.
It marks an extremely oversold condition in the average stock and has often sparked at least a short-term rally in the market.
That’s one reason it’s time to hunt for mean reversion opportunities in the market’s most beaten-up sectors.
While the Mag 7 are moving to record highs, other sectors are experiencing drawdowns. That includes stocks sensitive to developments in interest rates, such as financials.
With the Fed hiking short-term rates, that can hurt bank profits. Financials are also sensitive to the outlook for the broader economy, where Fed rate hikes could slow lending activity.
Financial stocks have been part of the broader pullback that’s gone too far, which is creating an opportunity to play a bounce.
Here’s the chart of the State Street Financial Select Sector SPDR ETF (XLF).
A negative momentum divergence hinted at brewing troubles with financials. You can see that when the Relative Strength Index (RSI) made a lower high even as XLF tested the prior highs (dashed lines). That pointed to stalling price momentum.
A subsequent selloff saw XLF cut through the 50-day MA (blue line). But there are signs that the selloff has gone too far.
XLF is now extended far below the 50-day. At the same time, the RSI is extending to oversold territory below the 30 level for just the seventh time in three years.
Those signals say that financials are due for a short-term recovery, at minimum.
Breadth across the market is hitting extremely low levels, and this is just one opportunity to trade a sector that’s primed to see a snapback rally.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
