The Bizarre Surprise in This Decline

by: Michael A. Gayed, CFA

“An action doesn't have to be wrong just because it is not logical. It doesn't have to be right just because it has logic.” - Lion Feuchtwanger

I absolutely love this. Markets have an amazing way of performing in the most illogical of ways. I run a screen every now and then on my nearly 1,000 ETFs/ETNs to find those areas of the investable landscape which are furthest below their respective 20 day moving averages. I've done these screens a number of times before to see if there is any kind of consistent message about what internal market dynamics are suggesting.

Everyone is certainly aware of the significant decline experienced worldwide in equities, and of course after the fact we try to find a narrative that can explain why it happened. The most cited reason for the decline relates to European markets, which are reacting to fears over Italy, Spain, and Greece, as well as a possible Lehman-like scenario in large banks. Certainly seems plausible, but how does that explain the below?

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That's right – the areas of the market most hit over the past two weeks which are furthest below their respective 20 day moving averages are for the most part unrelated to Europe. At the top of the list is the Dow Jones U.S Home Construction Index (BATS:ITB), Mortgage Finance (NYSEARCA:KME), Russia (NYSEARCA:RSX), and Regional Banks (KBE/KRE). What I personally find most interesting in the list above is that smaller regional banks rank among the worst. Regional banks are for the most part entirely dependent upon the domestic economy, and from a fundamental standpoint then have little to do with Europe.

I also find it interesting that Russia of all countries also got severely burned during this decline. Note that Russia is effectively an oil play, so it certainly is curious to see such a move. Given that the exposure of regional banks and Russia should theoretically be low to European problems, the magnitude of these declines may very well be unjustified.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.