The indices have been struggling to hold key support levels but are now starting to crack as negative news piles up. About three hours before the open, the S&P 500 ETF (SPY) is indicated lower by about 1.3%. Big cap technology names continue to be the main culprit but major money-center banks are also taking a hit due to money laundering charges.
There is plenty of negative news for the bears to dwell on this morning. First the technical conditions are already weak, then there's concern about a pickup in Covid-19 cases in various places, the political strife in Washington is going to accelerate due to the battle over the Supreme Court, fiscal stimulus is likely to be delayed, and there are reports that major banks have been doing business with 'suspicious' individuals from around the world.
It is a perfect storm of negatives but the big question remains whether this news flow will lead to correlated selling which takes down the entire market or will the strong rotational action that has been occurring under the surface continue?
This has been a tale of two markets recently with some major inconsistencies in the action. The Nasdaq is still quite extended and overbought as it rose over 20% above the highs it hit in February 2000. On the other hand the DJIA and Russell 2000 (IWM) never even surpassed their February highs. The Nasdaq name has been driven mainly by the FATMAAN names, while the great bulk of the market never came close to the same sort of overbought action.
Over the past couple of weeks, this inconsistency has started to correct, while the FATMAAN names and other big-cap technology stocks that drive the Nasdaq has been correcting, many other stocks in sectors like SPACs, Electric Vehicles, biotechnology, and precious metals have been performing like they are in a bull market. Many of these stocks were never wildly extended like big-cap technology and many of them still have solid fundamentals.
The issue at this juncture is whether the secondary stocks that have been doing so well can continue to resist the selloff in the big-cap names. Banks are adding to the downside this morning but it is still mainly the Nasdaq 100 heavyweights that are the key. Typically when leadership stocks like the FATMAAN names are being hit, buyers move to the sidelines and wait it out. There is usually limited buying interest when key names like Apple (AAPL) and Amazon (AMZN) are being hit but this correction has been quite different than most.
Gap-down opens on Monday morning tend to attract dip buyers, so we will see how much conviction they have. I have been saying for weeks now that it is a market for stock pickers rather than market timers, and we will have a test of that dynamic this morning.