Here’s What’s Different About This Pullback

  • Posted by on October 6th, 2015 at 2:07 pm


U.S. equities had a 5-day rally and as expected by many are encountering some selling pressure today.  Counter-trend rallies below 50 and 200dmas are typically guilty until proven innocent, but here are a few things that are different about this pullback compared to two weeks ago when Russell 2000 tested its Aug 24th lows:

  1. Japanese Yen is not rallying this time. The Yen rallying is a typical risk-off move that usually leads to a selloff in equities around the globe.
  2. The U.S. Dollar is fading, which is giving a boost to lagging sectors as energy, some basic materials and emerging markets.
  3. Earnings season is knocking on the door and market expectations are relatively low, which is usually a good foundation for upside surprises.
  4. Seasonality on the side of bulls this time.
  5. Many investors did not participate in the last 5-day rally and are waiting for a pullback to enter. It seems everyone was on the bandwagon two weeks ago and got burned as SPY, QQQ and IWM were slammed near their declining 50dmas. “A cat who sits on a hot stove will never sit on a hot stove again. But he won’t sit on a cold stove either”. May investors are the same way and highly impacted by recency bias. It takes time to go from a state of “fear of losing” to “fear of missing out”.
  6. The biotech sector is leading the selloff again, but this time correlations among biotech stocks are much smaller than 2 weeks ago. For example, look at $JUNO up 9%  today.

What has remained the same today compared to two weeks ago is that there is still not a very high number of decent long setups among high-growth leaders. Mostly laggards are leading this counter-trend rally. Some say that this is normal for early stages of market recoveries, but the truth is that growth leaders lead in healthy markets and without them any rally isn’t likely to sustain for too long.

The Latest

  • 15 Insights from Trading Psychology 2.0
    Posted by on September 24th, 2015 at 11:16 am

    I made so many highlights on Trading Psychology 2.0 that my kindle copy looks like a Christmas tree. I find it deeply insightful, eye-opening and […]

  • Volatility Tends to Top Long after Indexes Bottom
    Posted by on September 16th, 2015 at 10:39 am

    Volatility tends to remain elevated long after equity indexes bottom. The reasons are several: 1) No one is sure that indexes have really bottomed, options […]

  • Crash Course on Market Corrections
    Posted by on September 14th, 2015 at 10:02 am

    The odds of an investor experiencing a big market crash during his/her life are 100%. A well-diversified portfolio will save you from losing money in […]

  • Why Stock Picking Could Be A Big Challenge
    Posted by on September 11th, 2015 at 9:24 am

    1. Distribution in the stock market is non-linear. A small number of stocks account for the majority of profits. For each big winner that remains […]

  • Ten Smart Things Said About Market Corrections
    Posted by on August 23rd, 2015 at 10:11 pm

    Corrections of at least 8% in the major indexes happen at least once a year almost every year. Here are some of the wisest sayings […]

  • About Predictions and Markets
    Posted by on August 14th, 2015 at 8:19 pm

    Two things happen when enough people react to a prediction: 1) the prediction comes true faster than it otherwise would under normal circumstances. 2) the […]

  • The Twitter Dilemma
    Posted by on August 6th, 2015 at 11:58 am

    Many people are emotionally invested in Twitter and don’t comprehend the reason behind its poor track record as a publicly traded stock.   Twitter is […]

  • Quick Look At Market Breadth
    Posted by on July 25th, 2015 at 10:37 am

    In the examples below, I am using S&P500 data as a proxy for the market. First a short-term perspective: About 37 % of the SPX […]

  • About Over-trading and Under-trading
    Posted by on July 7th, 2015 at 10:17 am

    When volatility picks up, we should become less active and move slower. Hedge fund manager Frank Teixeira has good anecdote on the subject (ht midnight […]