Is This The Start Of A Correction?

What a week. Reddit & retail traders caught the world’s attention, stocks fell, hedge funds blew up, etc. Here’s what matters underneath an ocean of noise.

 

Weakening breadth

Breadth was incredibly strong for several months but is now weakening. The % of Russell 2000 stocks above their 10 day moving average has fallen below 35% for the first time in a long time.

Historically, such a weakening in breadth led to more short term losses for the stock market. The Russell 2000, one of the strongest indices since October, may be about to take a meaningful breather:

Meanwhile, large speculator positioning towards the Russell has turned negative for the first time in half a year. The only other time speculator positioning was positive for so long ended with the Q4 2018 stock market correction. This is a sample size of n=1, so take it with a grain of salt.

Insiders selling & taking advantage of speculation

Corporate insiders continue to sell their stocks while very few buy stocks. There was a surge in insider selling in stocks that exploded higher this week on retail buying. In other words, insiders are counting themselves lucky and selling as much as they can to the retail buyers.

  1. PETS: CEO, CFO, and 2 Directors sold millions in stock
  2. Interactive Brokers: CEO and CFO dumped millions in stock (before the uproar)
  3. Medallia: CEO sold $14.7 million in stock
  4. Blackberry: CFO and CMO sold almost their entire stake in Blackberry

Frothy sentiment

Sentiment has just started to back off from excessive optimism levels, but still has a ways to go before sentiment can be a bullish factor for stocks.

As I noted on Wednesday, the NASDAQ’s Daily Sentiment Index is elevated:

Historically, this was a minor short term bearish sign for the NASDAQ over the next 2 weeks:

The S&P 500’s Daily Sentiment Index is also elevated:

This is a short term bearish factor for the S&P over the next month:

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Jack F. Dawson 4 weeks ago Member's comment

Good read, thanks.

Mike Faragut 4 weeks ago Member's comment

Brokers/Banks and Retail traders will be on the hook for massive margin calls on retail investors. Also watch the overall market go down because people will have to sell their portfolios to cover said margin calls. People that over leveraged may have to file for bankruptcy, lose their house, lose everything. Since options expire weekly/monthly this could go on for a while and cause massive financial strain. - this could also be a culprit