The primary headline on Tuesday was the drop in the DJIA of 1.36%. It was the largest pullback in the senior index in a while, but it only amounted to a giveback of a couple of days of gains. The Dow is still sufficiently extended that no technical damage was done.
Once again, what was most interesting about the market action for traders was the rotational action. The stocks that have been leading recently and driving the DJIA, such as financials, cyclical, traditional retail, home building, home furniture, and RVs, lagged while the stocks that have been lagging for weeks, such as cloud computing, biotechnology, and speculative small-caps perked up.
The overall action on Tuesday was negative, but the recent leaders were the laggards, and the recent laggards were the leaders. The question now is whether this rotational reversal will gain some traction or will the struggles of growth and speculation start to spread to the broader market.
No one knows the answer to that question. We will have to monitor the action and watch support levels carefully. The main dilemma of this market for traders is that many stocks have been under pressure for months and are already deep into a bear market. They are struggling to find support and saw some relief yesterday, but the problem is that the secondary stocks are still at the mercy of broader market sentiment.
The business media are reporting that the primary reason for this difficult action is concern about inflation. Prices are obviously rising for things like lumber and even wages, and there is fear that it will eventually push the Fed to admit that inflation is not just transitory as they keep saying.
There is a CPI report this morning that is likely to be hot and help feed the inflation narrative, but this worry has already been out there for a while and maybe discounted already. We will see how things react, but the main issue is that inflation worries may simply be a good excuse for the messy rotational correction that has already been going on for a while.