Failed bounces are the essence of bear markets. It is when an energetic bounce crumbles and hopes are dashed that the real pain of a bear market is felt.
We had a particularly good illustration of that on Tuesday, as the very energetic action on Friday was largely reversed. The big move on huge volume had given the bulls some hope that maybe -- just maybe -- a bottom had been found, but they overlooked that much of the action was due to index rebalancing and not optimism about improved fundamentals and charts.
The Nasdaq and Nasdaq 100 filled the gaps that were created on Friday morning, largely thanks to very poor action in technology stocks. Breadth on the Nasdaq 100 (QQQ) was just five gainers to 96 decliners. Breadth for the growth stocks in the ARK Innovation ETF was zero gainers to 34 decliners. Overall market breadth was about three to one negative
This very lopsided breadth is typical of bear markets, because the selling comes from the top down. Indexes, exchange-traded funds, and broad market vehicles are sold, which sends all stocks down in tandem. Eventually, this creates some exceptional opportunities as many stocks are unfairly punished, but the problem is that there is no way to know how much longer the bear market action will continue.
Despite the gloomy action, there were only around 200 stocks at new 12-month lows. It is very important to keep an eye on this number. When the bounce failed in early June, the number of new lows ramped up very fast as the indexes breached support levels.
The indexes still have some support, before they retest the lows of the year, but if the new lows start ramping up, then increased caution is warranted.
This is classic bear market action. Stop trying to look for justifications to be bullish and embrace the misery.
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