As the first quarter draws to an end, the pressure to reposition for an economic shift is growing more intense.
Stocks were hit hard on Tuesday due to a combination of sector rotation, end-of-the-quarter rebalancing, and worries about an uptick in the number of Covid cases. Small-caps were particularly weak as they sold broadly and without regard to individual merit. There was no safe haven to be found.
What has been particularly difficult for traders is that the hot sectors they enjoyed at the start of the year have largely disappeared. SPACs, bitcoin-related, cannabis, biotechnology, electric vehicles, and gambling names have been chaotic at best.
The big cap technology and FATMAAN names that did so well during the Covid crisis last year have been languishing for months but saw some movement yesterday back into the group as a safe haven. This is part of the rotation and rebalancing that is happening to end the quarter.
The most interesting aspect of these market shifts is that they are occurring as the economy is on the brink of fully reopening, which should cause a sharp increase in economic activity. Market players are so confident of robust growth that it has caused worries about inflation and produced higher interest rates.
Yesterday worries about Covid popped up again, and that caused some reversal in the recent rotation, but it did not slow down the end-of-quarter rebalancing move that picked up steam.
There is no way to know how much longer this intense rotation and rebalancing will continue. We are still a week away from the end of the quarter, and Goldman Sachs estimates that around $58 billion in equities will have to be sold for funds to rebalance allocations between equities and bonds. That is in addition to the sector rotations taking place within the stock market.
The market has been undergoing these struggles for over a month now, and yesterday the frustrations of many market players were more pronounced. As I've written often, bad markets don't scare you, they wear you out, and yesterday there were some indications that this action is wearing out some folks that have not made good progress in a while.
Speculative traders have grown discouraged. That can last a while, but it is a necessary condition for the market to recoup and produce better action.
We have some bounce action this morning, and we will see how anxious trapped bulls are to look for an escape, but the unknown question right now is how much more rotation and reallocation will take place.