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As Bad As It Gets

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Hey, maybe you should put a negative scale on that chart!

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Sometimes things get so bad that they can't get any worse.

On May 9th, I showed a chart of the percentage of Fidelity Select sector funds that were outperforming the return on cash. At the time, we were seeing an ominous divergence, as broad indexes like the S&P were hitting new highs while the "best" stocks in many underlying sectors were undergoing distribution.
Once again, that type of divergence lead to a difficult market going forward. But now what's happened, through a combination of higher yields on cash and poor stock performance, is that none – not one – of the 40+ sectors have done better than cash.
This is exceptionally weak, obviously, and also quite rare. But when things look so bad that you wonder how it can get any worse, often that's just the case…it can't get any worse.
Over the past five years, we've seen zero sectors outperform cash three other times, and each coincided with a very tradable low in equities, almost to the very day.
This wasn't always the case, but over the past 20 years, the average three-month return in the S&P when this indicator hit 0% was +7.9%, with 89% of them showing a positive return.
Yes, the past 20 years were dominated by an historic bull market, but don't forget there were some dicey times – like 1987, 1990, 1994 and, oh yeah, 2000 – 2002.
It seems too early to be seeing this kind of extreme reading in the Fidelity Select funds when looking at the S&P 500, but don't forget some sectors have been absolutely beaten to a pulp over the past few weeks.
Many of the short- to intermediate-term measures I'm looking at confirm the damage and pessimism evident in the chart above, and I'm starting to warm to the idea that we're within days (5? 10?) of a bounce for which traders should be prepared to catch.
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No positions in stocks mentioned.

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