After bursting to a record high on New Year’s eve, January is quickly becoming a bit of a wipeout. Despite today’s positive move, the Dow Jones Industrials (^DJI) is down over four percent in 2014, as emerging market jitters rocked stocks in ways not seen in two years.
“The one rule of Wall Street that I always adhere to is, the crowd is always wrong,” says David Lutz, the head of ETF trading at Stifel Nicolaus in the attached video. “The market is going to do whatever causes the most people the most pain.”
While no one can say if or when this slump will end, Lutz will tell you that the tide has completely reversed in short order and that we are now definitely oversold.
“Only 3% of the S&P 500 (^GSPC) is now overbought,” Lutz points out, noting that just two weeks ago, “33-40% of the market was considered overbought.”
As for his pain trade thesis, Lutz says the first three weeks of trading saw a preponderance of short selling, where “12 of the first 14 trading session this year” saw more bearish bets than bullish ones.
In hindsight, with stocks down for the month and fear rising, that was the correct bet at the time, especially given the record run-up to finish 2013. But today, as is often the case, things look as if they have swung too far, too fast in the other direction.
“The number of stocks that are trading above their 50-day moving average (a classic ‘’overbought” indicator) is now at a one year low,” Lutz says. “There’s been a lot of pain inflicted on the market over the last week.”
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