There are two basic types of markets: those that are driven primarily by the indexes and those that are driven primarily by stock picking. This is an oversimplification, but I have found it very helpful in my trading to make this distinction.
The action on Monday is primarily index driven. The easiest way to determine that is to look at breadth versus the various indexes. While the S&P 500 is trading up 0.7%, overall breadth is mediocre at around 4300 gainers to 3650 decliners. The reason that breadth is so poor is that there is broad weakness in small-caps. Out of 1680 stocks in the Russell 2000, less than 500 are trading in positive territory, and the Russell 2000 is down 0.4%. On the other hand, the Nasdaq 100 is trading up 1.2%, and the breadth is 76 gainers out of 102 names.
Obviously, what is happening is that money is rotating out of smaller stocks and into big-caps. Rotation into big-caps usually occurs by buying indexes like the (QQQ) or (SPY) , while there is liquidation of more speculative names, which are often small-caps.
One of the reasons that this type of movement occurs is because it is the fastest, easiest, and safest way to put cash to work. If you work for a big Wall Street firm and your strategist is bullish for a trade, then you buy a big liquid ETF like QQQ
As I discussed this morning, Mike Wilson of Morgan Stanley pivoted and made some bullish comments, and that is probably part of the catalyst for better performance by big-caps.
Illiquid small-caps can be hurt badly in this sort of action, but they also can offer some good opportunities when they are sold without regard to valuations or fundamentals. That doesn't mean that they won't go lower, but it is helpful to understand that it is market dynamics that are hurting a stock rather than anything that is company specific.
One stock I've mentioned previously that I've been trading today is Ceco Environmental (CECO) . The company beat estimates, issued strong guidance, and has a big backlog of orders, but after gapping up to start the day, it sold off sharply. There wasn't any obvious reason to dump the stock on the good news, but with the small-cap trading environment poor, it set up a classic 'sell the news' situation. I sold some shares into the gap-up open, and now I've started rebuying on the weakness as I'm fairly confident that this is market-driven action rather than anything negative about the company.
I see some other small-caps I like driving lower as well. Beyond Air (XAIR) , for example, is struggling with very light volume. There isn't news, but there also isn't anyone interested in speculative small-caps that may be good values right now. Big buyers with cash are buying indexes for a fast trade and not small stocks.
Ultimately this sort of action always leads to the mispricing of some stocks. That will eventually correct, but it takes time and will require patience. The market does a very poor job of effectively pricing various stocks when the focus is on indexes and not stock picking.