Some great thoughts from Stan Weinstein’s Global Trend Alert newsletter on the recent selloff, and what to blame it on.
Note that Weinstein wrote one week ago about the invisible selloff (the divergence between small and large caps that wasn’t getting picked up by indices like the Dow), and the likelihood that that would spill over eventually into a larger basket of stocks.
Anyway, Weinstein’s observation for this week is basically this: don’t blame Egypt. The market was ready to sell, and it was just looking for an excuse.
Obviously the terrible news that’s coming out hourly from Egypt helped spark Friday’s sharp selloff. But we think it would be a mistake to simply blame it all on “Mideast Headlines.” As we said many years ago when we wrote our book (Secrets for Profiting in Bull and Bear Markets), “it’s not the news, but how the market reacts to the news, that’s really important.” And, as far as we’re concerned, this is simply “the excuse” that the market’s been waiting for to start a correction (as we’ve said before, with a tape this extended, it was “a correction waiting to happen”). In fact, all that’s taken place in the past week reinforces what we stressed in last weekend’s update, so let’s go through things on a case-by-case basis.
First of all, we told you last time that “we most definitely don’t like the short term ‘feel’ of this tape.” We also warned that “this advance is now becoming extremely selective and, in addition, as we said a few weeks ago was likely to happen, many of the big winners of the fourth quarter are now correcting sharply” (look at what has occurred in recent days to Amazon.com, American Intl. Group, Apache Corp., CH Robinson Worldwide, Compuware, Expeditors Intl., Ford, Freeport-McMoRan Copper & Gold, Murphy Oil, SanDisk Corp., etc.). So even though the market averages hit new bull market highs within the past 24 hours, nevertheless, as we stressed last time, “it’s not obvious by looking at the Dow, but there is already an ‘invisible correction’ taking place in plenty of the former leaders.”
Meanwhile, a chart that’s been going around is this, showing the number of stocks making 52-week highs. Despite the market (still) basically at new highs, the number of stocks at new highs has been down since early November.