A stealth correction is happening in the S&P 500, but history suggests it could be bullish


While the S&P 500 remains just over 2 percent from its all-time highs, a surprisingly large number of stocks are still in correction territory or worse.

“The average S&P 500 stock is 13 percent below its 52-week high. But … the index is only 2 percent below its 52-week high,” Michael Batnick, director of research at Ritholtz Wealth Management, said Tuesday on CNBC’s “Trading Nation.”

The average decline from 52-week highs for S&P components is more than the 10 percent level that indicates a correction.

For around one-fifth of the index, it’s even worse. As many as 113 S&P 500 components have fallen at least 20 percent from 52-week highs. The worst hit, Newell Brands, is down nearly 57 percent.

But Batnick says this could actually be a bullish sign for the stock market.

“When you have these corrections under the surface, the lagging stocks catch up to the index, and it’s no harm, no foul. … Every time in the past where we’ve seen either a VIX spike or a washout where we see 52-week lows spike, that has been a really good buying opportunity,” he said, referring to Cboe’s volatility index.

A peak in volatility and spike in stocks at 52-week lows in February, for example, led to a rebound on the S&P 500 during the following six-month stretch. During that February sell-off, the VIX peaked to over 50, a multiyear high, while the S&P 500 tumbled nearly 12 percent.

The opposite scenario where most stocks rally alongside the broader index would be a worry to Batnick.

“If we were in a situation where all stocks were hitting 52-week highs, that would be euphoria and that would be much more of a reason to turn cautious as opposed to what we’re seeing today, which is some stocks are going up, and some stocks are going down and this is pretty normal behavior,” he said.

Just 50 S&P 500 stocks were less than 2 percent from 52-week highs on Tuesday.

Original Source