The market has been dealing with very significant rotational action as we head into Thanksgiving week. The disconnect between the indexes driven by big-cap technology stocks and the broader market is at an extreme. Never before have so many Nasdaq stocks been hitting new 12-month lows while the Nasdaq hits new 12-month highs. Despite the strength in the indexes, breadth has been two-to-one negative the last couple of days.
What is most remarkable about this action is that it is barely discussed in the business media. There is some acknowledgment that the Russell 2000 ETF (IWM) is weak, but the primary focus is on how extended the senior indexes have become. There is plenty of talk about a bubble, but it ignores the fact that just 44% of all stocks are above their 200-day simple moving average. To call that a bubble is laughable.
The great difficulty in assessing this market environment is that it will reverse eventually but when and how are impossible to determine. Many market participants are concerned that the broader market won't be able to rally if the indexes are correcting. That isn't necessarily so. There are many times when secondary stocks show good relative strength versus the indexes, but it usually is not well covered in the media.
What adds an interesting twist to the action this week is the positive seasonality around Thanksgiving. Typically, aggressive traders are more active and focus on more speculative names. Traders that were active back during the bubble in 1999 have fond memories of names like Books a Million that went crazy.
Over the last 61 years, the S&P 500 has been up 77% of the time on the Wednesday before Thanksgiving and up 70% on the Friday after. That strong performance tends to reverse on the Monday after Thanksgiving when the S&P 500 has been positive only about 34% of the time.
It is important to keep in mind that seasonality is a tendency and not a certainty. In recent years the speculative trading around Thanksgiving has not been as vigorous, but there is an interesting setup for small-caps as the Russell 2000 has been pulling back to support for a couple of weeks following a classic technical breakout. Combined with the strong rotational action, the smaller and secondary stocks are in good shape for a bounce just as the positive Thanksgiving seasonality hits.