The last few weeks have been wild for stocks. Markets, on Monday, witnessed the largest single selling day since the pandemic lows in March 2020 in stocks and exchange-traded funds (ETFs).
The monster selling day came after a significant depletion in market breadth in the last few weeks. Massive selling in stocks can be alarming, but significant pullbacks serve as long-term opportunities for investors practicing patience. Keeping calm is key when it comes to investing.
There are mounds of data to look through, and there is also a relative strength index (RSI) for clues on momentum.
While the market was soaring and celebrating the record-highs, things were not quite healthy under the surface. What usually follows such a day is a bounce the next day or in the following days since a large number of investors selling suggests a near-term oversold signal.
The very recent rebound in trading reminds one of that narrative. Too bearish is not healthy either. There are two opportunities, the hardest-hit area, signaling value.
Small-cap stocks have suffered magnificently in the past month. The Russell 2000 index, for instance, has dipped 8.85% from its near-term peak on June 25, 2021. The pullback is a potential signal that the group is ready to bounce.
Next is the outperformer, the area for continued strength. For instance, the health care sector, the Health Care Select Sector SPDR Fund (XLV), is trading at highs, indicating leadership.