After a strong open on Tuesday, stocks reversed lower and had a soft close. Breadth was just slightly negative, and the S&P 500 still had a gain, but the market needs a rest after a solid rally over the last couple of weeks, and that is what we are seeing.
Small-caps lagged as the Russell 2000 ETF (IWM) went from a gain to a loss of 0.75%. Speculative trading in some of the junk SPACs reversed, and aggressive traders found themselves leaning the wrong way if they had chased some of the crazy momentum. The action had become a bit frenzied in spots after the Trump-related SPAC, Digital World Acquisition Corp (DWAC) , went from $10 to $175 in two days.
Bitcoin is also cooling off after a very strong run. The speculation in cryptocurrencies has helped to improve the mood in the market, but the sector is now technically extended just like many stocks.
Earnings from Alphabet (GOOGL) , Microsoft (MSFT) , Twitter (TWTR) , and a number of other companies were generally good, and there are some target increases, but there also is some inclination toward a 'sell the news' reaction. The Google report looked very solid, but the stock is struggling to stay in the green in the early going.
What we see at this point is healthy consolidation. It can be called stalling or rotation, but it all serves the purpose of letting stocks rest before they embark on the next step in their journey.
The bears have a tendency to see consolidation or stalling as a sign that a top is forming. They will say things like 'a top is a process' to send the signal that we should start to worry. While this could be the start of a market turn, there is no evidence yet that that is the case. This is just some run-of-the-mill consolidation so far.
My thesis for quite a while has been that many secondary stocks have been basing for months and are setting up well for an end-of-the-year run. That continues to be the case. The Russell 2000 has yet to take out the highs it hit back in March. That is the key breakout level, and it is being watched carefully.
We have a flat open on the way, and I'll be watching for opportunities to add to some position as they consolidate further or show improved technical action.