Your Stock Market Headache is About to Get a Lot Worse

Not only is cold and flu season kicking into high gear – it’s also time for another market migraine.  We’ve enjoyed only two days of the major averages closing in the green so far this month…

And as you’re about to see, the market could stay ugly for the foreseeable future. But you’re also going to see how you can limit your risk by avoiding 3 especially hairy sectors right now.

But first, let’s dig into another ominous market event…

The S&P 500 has once again snuck below its 200-day moving average. So you can expect more skittish trading, more whipsaws — and more investors hanging on the Fed’s every word as next week’s big day draws closer.

And the noise machine is about to crank up to “11”— meaning you’ll have to endure a bunch of vapid market think-pieces blaming this year’s lackluster performance on one thing or another.

Don’t listen to it. There’s something else you should be aware of instead…

“To me, the reason why is probably less important than just having the awareness that short-term traders act differently above and below these support levels,” comments Josh Brown on his Reformed Broker blog. “Trigger fingers get itchier, liquidity becomes more in-demand and story stocks lose their appeal.”

That means you have to continue to be extremely selective in your trading as the year winds down…

Flatlining

Here are the real market soft spots you should probably avoid in the coming weeks:

1. Oil

This one’s a no-brainer. Investors are freaked out by crude’s rapid descent. Yesterday’s action was telling. As oil rebounded in the morning, the major averages enjoyed a brief bounce. But when crude wen red, stocks followed it right down the rabbit hole.

While oil and stocks are not statistically correlated lately, it’s clear that crude’s tumble is switching a lot of folks back to “risk-off” mode.

2. Transports

What has four wheels and has run off the road into a ditch this month? You guessed it: transportation stocks.

The trannies were mounting a nice little comeback until about mid-November. And once the calendar turned, they fell flat on their faces. Lower fuel costs be damned! The Dow Jones Transportation Average is down nearly 6% in December—and off by more than 16% year-to-date. That ain’t bullish…

Remember, we’d like to see the transports and the Dow industrials confirm each other’s uptrends to signify a strong market. That hasn’t been the case for nearly four months now…

3. Small stocks

As early as the end of October, we were waiting for a powerful small-cap snapback rally. The Russell was quietly starting to outperform its larger cousins. And after dragging behind the S&P 500 more than 10% over the past 24 months, we figured it was high time these smaller stocks got their act together…

Of course, a shove in the back from small-caps could also encourage the major averages to get back on track, too. But December had something to saw about all that…

Small-cap stocks have endured a sharp decline this month. While the S&P 500 has dropped about 1.6%, the small-cap Russell 2000 is off by 4.3% in December alone. Now, we’re starting another small-cap breakdown right in the kisser.

In this market environment, you can’t let a breakdown like this get away from you. Remember, in order to protect your profitable positions, you have to cut the losers before they can do any real damage…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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