These 3 Charts are Terrifying Investors...

Every investor in the country is getting sucked into election season drama.

News that the FBI is preparing to dig through 650,000 of Huma Abedin’s emails found on her sexting-aficionado husband’s laptop sent stocks reeling on Friday afternoon. Sellers stepped up to the plate and tossed the major averages into the red as Hillary Clinton’s dominant lead is disappearing in the wake of an expanding email scandal.

Now that Anthony Weiner is back on the front page, this election has officially turned into a three-ring circus. You couldn’t make this stuff up if you tried. And the stock market doesn’t like it one bit…

Investors are spooked. Stocks have acted poorly all month. As a result, we’ve seen plenty of sellers dragging down some of the most vulnerable stocks and sectors.

Just a few short weeks ago, we showed you how positive momentum in a couple of key groups of stocks was bubbling up under the market’s surface. Our thought was the market was quietly shifting to “risk-on” mode while most investors were too scared to act.

The evidence was all around us. Investors were ditching safety plays like utilities and consumer staples stocks that were so popular earlier in the year. Even the price of gold fell off a cliff.

Now the month is all but over. But our risk-on indicators aren’t improving. A few are even beginning to break down.

Here are three charts that are scaring the bejesus out of investors as November approaches:

1. Small stocks fall off a cliff

We’re always keeping a close eye on small-caps. If smaller names are performing well, that’s usually an indication that investors are feeling bullish.

Small-cap and microcap names were finding new life and spanking the major averages just a couple of months ago. Not anymore.

Thursday’s big push lower dropped the Russell 2000 small-cap index to three-month lows. Four straight days of losses breaks the Russell down below key support. See for yourself:

smallcapsplunge-dr

The S&P 500 is down a little less than 2% in October. The Russell 2000 has dropped more than 5% this month. That’s not exactly bullish…

2. Biotechs can’t bounce

Biotech stocks quietly snuck higher back in September as the major averages remained trapped in the spin cycle.

But investors have wanted nothing to do with speculative biotech names in October. Like small-caps, these former standouts are quickly deteriorating…

blastedbiotechs-dr

All that hard work biotechs put in building off their Brexit lows is beginning to evaporate.

We talked about how biotech stocks are quickly becoming one of the market’s big “tells” just a few weeks ago. The biotech sector was one of the hardest-hit areas of the market over the past couple of years. But it enjoyed a nice summer rally. Now that the summer strength is gone, we’re left watching these speculative names push to three-month lows.

3. Breadth continues to deteriorate

We want to see broad participation in market rallies—not just a few big-name stocks propping up the Dow and S&P 500.

But right now, we’re seeing just the opposite. Fewer and fewer stocks are in well-defined uptrends. And that ain’t bullish, my friend.

The percentage of stocks in the S&P 500 above their 50-day moving averages has shrunk substantially since stocks rocketed off their June lows. Check it out…

badbreadth-dr

Right now, less than 35% of large-cap names are above their respective 50-day moving averages. We’ll need to see a bounce in this indicator before we can put our full trust in any market rally…

Now that October is almost in the books, our job is to figure out whether this month’s bearish action is the final shake-out before a year-end rally—or the beginning of a bigger drawdown.

Keep an eye on these three charts this week. They’ll tell you almost everything you need to know about the market…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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