Although the S&P 500 has completely recouped all the losses it suffered during the Covid-19 crisis and is hovering near an all-time high, there have been some shifts in the price action that raise some concerns.
The primary change lately has been some very aggressive rotation out of the market leaders that have racked up the biggest gains since the March bottom and into the laggards that have performed the worst. Groups like financials and industrials have strengthened while big-cap technology and biotechnology have weakened.
Rotational action can be quite healthy as it shows that market players aren't just blindly chasing momentum. They are concerned about valuation and are looking for stocks that may offer better entry points. The problem is that the stocks have lagged usually lag for a reason. They don't have the same levels of growth, they are not innovative leaders, and they seldom lead for long.
On Tuesday we had a brief taste of the danger or rotational action when the rotational stumbled and selling suddenly broadened out. There were some second thoughts about reinvesting in some 'value' names that had suddenly jumped.
What we have to watch most closely right now is market breadth. If the selling becomes more correlated and rotation turns into distribution, that will be a key warning sign that will require a higher level of defense.
A second warning sign that is starting to develop is a slowing in the speculative activity that has been so strong for a couple of months now. The number of small-cap stocks that are marking large intraday moves is declining and there appears to be less chasing of the wild momentum. There is still plenty of traders hunting for the next big mover but I'm seeing a shift in this action and it will impact overall market sentiment if it continues.
The sharp drop in precious metals and miners is a third warning sign that requires some contemplation. This has been a hot group for months and the bulls grew quite complacent as the sector trended steadily. Precious metals and miners often seem to trade in a random manner but the sudden drop on Tuesday is a good illustration of how 'hot' stocks can suddenly plunge without much warning.
I constantly warn about being too anticipatory about a market correction during an uptrend and I do not want to suggest that it is time to embrace the bearish view, but there are some flaws in the price action that require heightened vigilance. That doesn't mean randomly dumping stocks that are performing well but it does suggest we be less forgiving when stocks are not acting the way we would like.
We have some minor pressure in the early going as stimulus negotiations hit a roadblock and trade issues become more contentious.