The S&P 500 started the year with a bang, up 7% in January, an incredible feat considering that 2017 was a great year. Typically big monthly returns on the S&P 500 like the one in January come after big down months.

Things were getting a little ridiculous, Boeing ($BA) a huge mega-cap stock was up 5% pre-market after they reported their earnings. You know it’s kind of late when stocks like $BA start trading like momentum stocks.

Then you had the Johnny come lately, 100 billion dollars went into passive ETF’s in January, talk about plunging in.

They also decided to use a little margin.

And just because…

The other can’t lose trade was shorting volatility via long $XIV and $SVXY; huge money went into those two funds in January. Unfortunately that all came to an end yesterday.

The S&P 500 has now retraced the entire 7% and then some, as of right now (2/6/18 pre-market) the S&P 500 is down 3.3% year to date. That might not sound like a lot to the local blogger, but many who scoff at this little sell-off don’t realize that many people own individual stocks that have much higher betas than the S&P 500.

Basically, in a matter of a few days, we went from somewhat euphoric action to extremely oversold levels not seen in nearly 3-years.

We had a quick breadth flip, stocks up 13% or more in the last 34-days literally fell off a cliff, while stocks down 13% or more in the last 34-days sky-rocketed.

S&P 500 stocks above their 3, 5 and 10-day moving averages are down to 1%, levels not seen since we had the mini-crash back in August 2015 because of China.

We also had a spike in new 1-month lows.

A huge spike down in the difference between NYSE+NASDAQ advancers minus decliners.

The percent of stocks above their 20-day moving average also got to very low levels, 10%.

As you can see in the charts above, these type of spikes in breadth figures typically lead to a bounce that is usually then RETESTED with better breadth figures creating a positive divergence. And I believe that the market ETF’s (SPY, IWM, DIA, QQQ) are the go-to names if one is looking to play a bounce, on the retest you can then look at some individual names. If you are trapped in a few longs, it might be a good idea to untrap yourself from those longs on the first bounce.

I know it has been a long time, and we’ve been rocked to sleep by such low volatility, but pullbacks are normal, they happen, and they are common.




Frank Zorrilla, Registered Advisor In New York. If you need a second opinion, suggestions, and or feedback in regards to the market feel free to reach me at or 646-480-7463. 


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