Stocks Decline On Monday Even Though They Are Oversold

Stocks Decline Again

I’m surprised stocks fell on Monday. The market is very oversold which usually implies a bull run is coming. I’m not saying stocks should hit a new high. But I think a 2% to 3% recovery this week is in the cards unless there’s a negative catalyst.

The S&P 500 14-day relative strength index is at 28.93. It’s below 30, meaning the market is oversold. The CNN Fear and Greed index is at 11 which indicates extreme fear.

Just because the market has been oversold for a few days doesn’t mean these indicators aren’t accurate. Stay patient and buy stocks.

The S&P 500 fell 0.59%, but it is still above Thursday’s close. I expected a big gain, so a small loss is disappointing.

The Nasdaq fell 0.88% as tech stocks led the market lower again. Adobe stock fell 4.4% and Nvidia fell 4.5%. Russell 2000 was up 0.41%, vindicating my bullishness on small caps.

Stocks Decline – Traders Are Short Volatility  

The VIX was down 0.05% to 21.30 even though the market fell.

That’s not completely shocking because when it’s at that level it needs more volatility to move it up than it would need if it was back in the low teens.

As you can see from the chart below, the net futures positioning of traders is short the VIX.

That’s interesting because at the end of the correction this year, traders were long the VIX. They were short the VIX at the end of 2017. Essentially, traders were wrong at the end of 2017 and the beginning of 2018. They were also wrong to be short the VIX in the summer.

However, I wouldn’t be surprised if they were correct now because I’m expecting a rebound. If traders need to be wrong, we’ll need to see them go long the VIX before stocks rally.

Stocks Decline – Tech Falls And Consumer Staples Rally

The worst sectors were technology and energy as they fell 1.64% and 0.82%. Tech stocks have outperformed for so long that this sector rotation isn’t a surprise.