As we kick-off a big week of earnings, the S&P 500 (SPY) is in an attractive position technically although there is substantial rotational action under the surface. The S&P 500 is just below the highs it hit on June 8 at 3233 and has a decent foundation for a push higher.
While the S&P 500 looks healthy here, it is the action under the surface that is of most interest. In the past week, many of the key big-cap momentum names have seen some struggles. Good examples are Zoom Video (ZM) , Zscaler (ZS) , Fastly (FSLY) , and Bilibili (BILI) . Even the FAANG names have weakened in the past week which is causing some underperformance for the Nasdaq 100 (QQQ) .
Some of the money moving out of momentum and growth has moved into financials and other value names. There is a hunt for stocks that are not as expensive and that is what is helping to hold up the S&P 500.
As we move into earnings reports this week, we will see if this shift out of momentum growth continues. Netflix (NFLX) earnings last week is a warning sign that maybe some of the optimism about 'stay at home' stocks may not be warranted but this is a market that has loved buying dips in FAANGs and that is likely to continue into any deeper pullbacks.
While there is interesting rotation action taking place at the top levels, there continues to be fast and furious trading in highly speculative small caps at the lower level. This action has attracted a crop of new traders that are looking for action and when they don't find it, they create it.
What many market pundits seem to miss about this trading action is that it is purely price-driven. These traders don't care about valuation and macro-economic arguments. They just want stocks that move and all they need is a good story. Sectors like Electric Vehicles and SPACs have been the primary focus but there are dozens of new trading candidates each day.
This mix of action with rotation at the top and speculative trading at the bottom makes it very tough for market times. The indices are uncorrelated and the profits are found in individual stocks.
To navigate this market right now, it is paramount that you be clear about your approach. Market timing is tough and the rotational action is tough to gauge. The speculative trading requires great vigilance and discipline.
We have some slight weakness in the early going. My game plan is to stay focused on stock picking as I monitor the breakdown in momentum and the rotational action.
