Monday Was the Biggest Day of Selling Since Pandemic

What’s Next?

Welcome to summer volatility! The past few weeks have seen some wicked action in stocks. In fact, on Monday (according to my proprietary data: Big Money Index), markets saw the largest single day of selling in stocks and exchange-traded funds (ETFs) since the pandemic lows … back in March 2020.

And as I'll show you, this monster day of selling came after a large deterioration in market breadth over the past few weeks. So, from my standpoint, it's not that surprising. 

And while huge selling in stocks can seem very alarming, I see big pullbacks as long-term opportunities for patient investors. Keeping a sound head when it comes to investing is key. And I'll tell you an area I see as ripe for opportunity.

Key Takeaways

  • Stocks and ETFs saw the biggest single day of selling all year.
  • Most of the selling was seen in small-cap stocks.
  • Consider playing a bounce in small-cap stocks via the iShares Russell 2000 ETF (IWM).
  • One group showing strength is health care. Consider the Health Care Select Sector SPDR Fund (XLV) to bet on more gains for the sector.

But first let’s look at some charts. Remember how I told you that yesterday was a big day of selling? If you aren't plowing through mounds of data like I am each day, you can simply look at the relative strength index (RSI) for clues on momentum.

Below is a chart of the S&P 500, represented by the SPDR S&P 500 ETF (SPY), with the RSI indicator below it. While the market was humming along near all-time highs, things were clearly not so healthy under the surface.

Chart showing the performance of the SPDR S&P 500 ETF (SPY)

And this begs the question: What’s next? Well, historically, when I've seen selling like this, markets usually bounce the following day or in the subsequent days. And that makes sense. If lots of investors are selling, it can suggest a near-term oversold signal.

Today's rebound in trading lines up with that narrative. And while we aren't fully out of the woods yet with stocks, it does appear that a lot of the damage was already done. In other words, be careful getting too bearish!

So, where's the opportunity? I'll give you two ideas. First, consider what area has been hit the hardest. That can signal value. 

Small-cap stocks have felt the biggest brunt the past month. The Russell 2000 index, represented by the iShares Russell 2000 ETF (IWM), has fallen 8.85% from its near-term peak on June 25, 2021.

Chart showing the performance of the iShares Russell 2000 ETF (IWM)

This pullback could signal that the group is ready for a bounce.

Next, let's look at what has been performing well lately as an area for continued strength. For that, I'm checking out the health care sector. And a good barometer for the group is the Health Care Select Sector SPDR Fund (XLV). It's trading at highs, signaling leadership for the group.

Chart showing the performance of the Health Care Select Sector SPDR Fund (XLV)

So there you have it – two ways to play the recent selloff in stocks.

The Bottom Line

Let's wrap this up. Monday was the largest day of selling in stocks and ETFs based on my proprietary Big Money signals. You can see similar deterioration in the RSI. Those hoping to play a near-term bounce could look to the iShares Russell 2000 ETF (IWM) or consider betting on strength in Health Care stocks via the Health Care Select Sector SPDR Fund (XLV).

Disclosure: The author holds no position in SPY, IWM, or XLV at the time of publication.

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