Wednesday was one of those stealth days where the senior indexes held up quite well, but under the surface, the action was quite poor. We haven't seen this kind of day lately. Breadth was around 2,500 gainers to 5,700 decliners, and new 12-month lows expanded to over 500 names.
This poor action was reflected in the Russell 2000 fund (IWM) , which was down over 2% before a late-day bounce. It also filled the gap on the chart that was created on Friday morning. Much of the action looked like a reversal of some of the rebalancing that took place last week, but it was also driven by some end-of-the-quarter repositioning where the worst-performing stocks were likely dumped. Many of those are illiquid small caps that have been struggling for a very long time.
We still have the potential for some positive seasonality in front of the holiday, and the gloomy mood that existed Wednesday may help to trigger some sort of bounce or squeeze action. Counter-trend moves in this sort of environment can be very robust, because investors are not well prepared for them and have to scramble to add long exposure.
The most important issue right now is to not confuse a bounce with a bottom and to make sure that you are very clear about time frames. There are many stocks that I like longer-term, but I don't want to build positions, although I may trade them in very short-term time frames.
Quite often, when the market feels so gloomy, there is an inclination to resort to contrary thinking and declare that it is already so bad it can't become much worse. It isn't very scientific, and it is difficult to find hard data for that thinking, but when a trader is anxious to go long, then it is a convenient justification.
I expect some positive trading in the next couple of days, but it is going to be a long, tough slog before we have a healthier market.
