The market suffered a classic failed bounce action on Thursday that produced a retest of the lows hit during the panic selling on Tuesday morning. The volume picked up on the drop, and the failure to build on Wednesday's bounce undermined hope that a V-shaped bounce would ensue.
The primary explanation for the weak market is a spike in bond yields. There was a particularly poor bond auction on Thursday, and the IShares Barclays 20+ Treasury Bond Fund (TLT) has dropped nine of the last 10 trading sessions. TLT drops as interest rates rise.
The market has been looking for a reason to correct after a powerful run, and bonds are good of an excuse as any. The froth in groups like SPACs, cannabis, biotechnology, and short squeeze plays was a good setup for some reversal action. There is still not much support out there, and groups like SPACs have not yet found support.
The most interesting aspect of this action is that it was triggered by increased optimism about reopening the economy. Money rotated into airlines, hospitality, cruise ships, amusement parks, and other groups that will benefit from a return to normal. Big cap technology, which has been a major beneficiary of the shift to 'work at home', has been consistently under pressure with the FATMAAN's lagging badly.
The improvement in economic conditions and the likelihood of more stimulus soon suggests that this is not the advent of a major bear market. This is a much-needed corrective action that causes some pain and anxiety but once the rotational action is mostly finished and speculative stocks reset, the stage will be set for another run.
The key at this point is keeping losses contained, protecting capital, and preparing for better market action down the road. While losses are never pleasant, the good news is that this action is what is needed for much better opportunities in the future.
For thousands of years, the chief characteristic of markets is cycles of ups and downs. It never changes, but the timing is always challenging. Rather than try to fight this inevitability, we need to embrace it and use it to prepare for the next shift.
We have a continuation of the selling in the early going as overseas markets were hit overnight. Bond yields are stabilizing, but speculative assets like bitcoin are under pressure again.
I've raised quite a bit of cash this week, and my game plan is to continue to manage existing positions closely and to refine a shopping list for gradual implementation. There are already some good values in groups like SPACs and cannabis, but the price action is still poor, and there is the danger of further downside.
The goal isn't to buy stocks at the bottom tick but to buy them when they have the best chance of sustained recovery.