Over the last couple of days, the market has suffered some corrective action, with small-caps bearing the brunt of the damage. The senior bounced back nicely after gap-down opens on Wednesday and Thursday, but the small-caps lacked similar buoyance.
Given that the Russell 2000 ETF (IWM) has substantially outperformed the S&P 500 so far this year, it is not too surprising that it would suffer deeper corrective action.
While the selling has been more correlated over the last two days, with breadth running around 3 to 1 negative and a collapse in the number of stocks hitting new 12-month highs, it is still largely rotational. There simply are more small-cap stocks than large-cap stock, so when the group does sell off, it tends to cause poor breadth.
The more important issue right now is whether this bout of selling is just some much-needed corrective action that will help to eliminate overbought conditions and set the stage for another run, or is it the start of a major change in trend that the bears have been predicting for many months.
It is premature to jump to a conclusion but, so far, the selling action has tended to hit the most extended stocks the hardest, while there are some signs that support is holding in many places. On Thursday, the group that was hit the hardest was bitcoin-related names, although bitcoin itself held up quite well. The speculative fervor cooled a bit in the group, which isn't a bad thing after the run that it has had.
The biggest positive that this market has going for it continues to be the speculative liquidity that keeps rotating into various sectors. That liquidity looked a bit confused and uncertain yesterday and wasn't too quick to jump back in, but it has not gone away. I expect it to jump back in some of its favorite groups again quite fast. I'll be watching cannabis names and some select SPACs.
Keep an eye on the ARK Innovation ETF (ARKK) as a bellwether for speculative action. This ETF has been the market leader in 2021 and will provide some insight into the market mood. It has reversed sharply over the last three days but is bouncing back this morning. If it undercuts the Thursday low, then selling momentum will build quickly.
We will see how the market treats the bounce action this morning. The mood feels rather complacent, but the selling of the last few days has made the dip buyers a bit less confident.
My game plan is to continue to focus on stock picking. I'll be cutting things that are breaking support, but I see quite a few stocks drifting lower on lighter volume that are of interest on an incremental basis.