It is not at all evident from the indices, but back in February, small-caps, growth stocks, speculative names, SPACs, biotechnology, and a variety of other sectors and group saw a major top form. These stocks downtrended for months, and many fell deep into bear market territory. These groups finally found some support in the last month and bounced big starting on August 20, which coincided with my misadventure with a copperhead snake.
The action today is the most aggressive selling that we have seen since the Snake Bite Bottom, but the big question is whether this is just a brief flurry of broad selling pressure, or is this similar to what happened back in February when a major downtrend in certain sectors developed?
I suspect that answer is somewhere in the middle. Many of the stocks that have bounced back recently are not extended and still are nowhere close to the highs they hit early in the year. They need a rest after a good run. However, we are now in a tough time of the year seasonally, and the indices and many big-caps are still rather frothy. A deeper correction at this point would be quite healthy, and it would set up things well when third-quarter earnings hit, and we enter the best time of the year from November through January.
At this junction, I'm giving this corrective action some room to play out further. There are some names I'd like to buy right now on weakness, but I'm going to wait and see if they dip more in the days ahead. The market often has a tendency to bounce back very fast from these dips, but I believe there are enough traders that were scarred by the action following the top in February that they may be a little more cautious this time.