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The Stock Market Is Weaker Than It Looks - Barron's


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The SP 500 and Dow on Wednesday are on track to extend their rallies after Monday's selloff.


While the broader stock market may have rebounded from Monday’s selloff, the rally has masked the pain felt in several sectors. 

On Monday, the SP 500 fell 1.6% and, at its lowest, was down was more than 3% below its all-time high. The index has made a swift rebound, now less than 1% below its high, and is far away from correction territory, defined as a 10% drop or more from a recent high. 

But correction-like movements have been happening beneath the surface. Heading into Wednesday’s trading, 36% of SP 500 stocks were trading above their 50-day moving averages, down from 91% in April, according to Truist data. That suggests the stock market has been correcting itself for a few months, which isn’t immediately evident by glancing at the SP 500, writes Keith Lerner, chief market strategist at Truist. 

Some of the most economically sensitive sectors have been particularly weak, with financials, materials, and energy stocks as prime examples. About 14% of SP 500 financial stocks were trading above their 50-day moving averages heading into Wednesday, while 11% of materials and zero energy stocks were trading above that average. Those are the three weakest SP 500 sectors by that metric.

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The  SPDR SP Bank exchange-traded fund (ticker: KBE), Materials Select Sector SPDR fund (XLB), and  Energy Select Sector SPDR fund (XLE) fell as much as 15%, 10%, and 16%, respectively, on Monday from their 2021 highs. The bank and energy funds were still in correction territory on Wednesday.

The drawdowns come as investors grow increasingly concerned about the Covid-19 Delta variant’s spread and signs of peaking economic growth. But the variant’s spread seems unlikely to prompt economic lockdowns like those seen in 2020. Plus, studies show that vaccines are effective against the new variant. That could make financials, materials, and energy stocks ripe for buying. Truist calls those cyclical stocks oversold because less than 30% of the stocks in each of those groups are trading above their 50-day moving averages. 

Others share the same sentiment. “We’re going to get back to that [cyclical] trade eventually because that’s where the fundamentals are,” says Jason Pride, chief investment officer of private wealth at Glenmede.”

This could be a reason to buy the dip in battered cyclicals. 

Write to Jacob Sonenshine at [email protected]