The trading action in the last couple of days of the year can be very difficult to navigate as it typically has little to do with fundamentals or technical conditions. Most of the moves that are made are due to tax issues or positioning for the new year. Many fund managers are engaged in window dressing so that their clients won't be too disturbed by the stocks that they are holding.
This has been a particularly poor year for professional money managers as it has been extremely difficult to keep up with the benchmark indexes unless the portfolio is positioned almost exclusively in a few mega-cap names. Virtually every sector of the market has underperformed 25 of the biggest stocks in the market.
To a great degree, the indexes have not been a reflection of overall market health. They reflect a specific asset class of mega-cap stocks, and it just happened that that sector was the big winner this year.
Since the business media and traditional Wall Street focus almost exclusively on the action in the indexes, they are seen as being the definition of the market. All the other action is irrelevant.
2021 is history at this point, and our job is to focus on what comes next. Will this narrow, big-cap domination of the market continue? Maybe but at some point, it becomes unsustainable. I believe there will likely be a shift in leadership, but I have no idea how that will eventually take place. I believe the best approach is to stay vigilant and wait for conditions to develop.
Unfortunately, we need to finish up this year, and as the action demonstrated yesterday, there is still tax selling and rotational action occurring. On Tuesday, we reverted to what has been going on much of the year as a few big-caps did well and helped the indexes while the majority of stocks struggled and saw pressure that had little to do with their individual merits.
Action at the end of the year is often random and volatile, and we should expect more of it today.
