After an 8% drop in the S&P 500 in the first two and a half weeks of the year, Wednesday started with an ugly sell-off. U.S. equity futures were a sea of red in the pre-market. Oil, as usual, was leading the downward press, and European stocks again followed.
At my usual 4:30 a.m. wakeup call, I was greeted with a few emails from London and Switzerland-based fund managers telling me the markets were about to fall into the abyss and laying out a variety of reasons for the malaise. By the time the U.S. markets opened, I had received at least five phone calls and numerous emails of a similar nature. Thus, from a sentiment perspective the day had all the potential of a good wash-out day.
Indeed, shortly after noon, stocks stopped falling and executed a strong bullish reversal. After being down nearly 4% intraday, the S&P 500 finished “only” 1.2% lower. The Russell 2000 saw an equally sharp loss in the morning, but by the day’s close actually managed to squeak out a 0.5% gain.
Small-cap stocks leading an oversold bounce is usually a promising sign. However, until we see follow-through confirmation buying in coming days we certainly do not have an all-clear buy signal.
Looked at through the lens of investor psychology, sellers simply exhausted themselves early Wednesday as negativity peaked.
Read my full analysis HERE