The corrective action that has been plaguing a number of small-cap sectors spread to the broader market on Tuesday. While there has been bear market action in areas of the market such as biotechnology, SPACs, gambling, and other speculative favorites for a while, it has not been readily apparent in the major indices. Even the Russell 2000 ETF (IWM) has held up relatively well while many stocks in the index have fallen sharply.
Yesterday the Russell 2000 had its worst single day of the second quarter, but many of the worst-hit stocks didn't fall much more. It was a new crop of names that suffered the brunt of the damage.
The question now is whether the weakness that has already hit some parts of the market very hard is going to weigh on other areas of the market? If it does, is it going to drive already broken stocks even lower?
To add to the challenges of the market, there was a rotation out of 'reopening' names on Tuesday as well. Airlines, cruise ships, traditional retail, and other groups sold off as concerns continue to grew that new variants of COVID will slow a return to normal. Countries like India are seeing a record number of cases, and in Canada, they are looking to shut down some major cities once again.
Earnings from Netflix (NFLX) last night disappointed, but even when there is good news lately, market participants are not willing to chase. The biggest challenge for traders is that even if a stock is holding support, it is unable to produce sustained momentum. A good example is Futu Holdings (FUTU) which jumped 16% out of a good base on Monday and then reversed and dropped 23% on Tuesday on no news.
There already is ugly bear market action in growth names, some momentum, and speculative small-caps. If the entire market had already corrected like these groups, there would be many market pundits predicting a bottom, but we have major inconsistency between various sectors of the market, and it is going to take a while for it to reconcile. Will big-caps catch up with the small-caps? Will small-caps start to show some relative outperformance, or will the gap between the groups close in other ways?
It is a very messy market situation right now, and there isn't much to do but to be patient as it is sorted out. There are scores of individual stocks that have been unjustifiably pounded recently. Many of them will recover well and offer good opportunities, but there is no way to know when the intense pressure will relent. We just need to watch them carefully and not put too much of our precious capital at risk too fast.
We have a flat open on the way, and there continues to be little energy.