In July I showed talked about the Russell 2K index and how it was underperforming
the broad market. I went on to explain what it likely meant was in store for
the US stock market this fall. The outlook was negative, just in case you were
wondering...
This week I want to talk about two different sectors that have often lead
the broad market in rallies and corrections over the years. These sectors have
underperformed the broad market much like that of small cap stocks, and this
does not bode well for investors going into fall.
In the analysis below I use Bollinger bands and trendlines. Using only these
tools keeps the charts clean and easy to understand. In short, once a trenline
has been broken that is the first early warning that a trend may be coming
to an end. The second is the break of a Bollinger band.
A combination of these can be taken as a trend reversal and likely the start
of a multi week or month correction. This will depend on the chart time frame
you are reviewing though. I use a similar method to identify trends with my
automated futures trading system.
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If you are wondering what exactly these two charts are pointing to... let
me share my outlook.
Because we have seen the support trend lines broken to the downside this month,
and the fact that price has pushed more than 2 standard deviations from its
norm, the odds favor more downside is to come.
From years of experience trading price patterns and breakouts I know that
when price breaks to the downs side and triggers fear among its investors it
is typically your best time to sell short so you can profit from the falling
prices. Fear is the most powerful force in the stock market and it must be
traded much differently than when prices are rising.
Although I feel the broad market is still within its uptrend, these two underperforming
sectors may just continue to sell lower. Obviously once the broad market rolls
over, these sectors should fall even faster to the downside but until then,
they could chop around and grind their way down.
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