Over the last couple of weeks, as the indices were hitting new all-time highs on negative breadth, many market players were wondering what would the lagging stocks do when the indices finally corrected. Could the groups that have been beaten up badly, such as biotechnology, growth, cannabis, gambling, etc., bounce back when the indices corrected, or would they be dragged even lower when the DJIA finally took a 2% hit?
The answer to that question appears to be that buyers are ready to jump back into the lagging names when the senior indices are correct. It is a reversal of some of the recent rotational action. This time the money is flowing out of the FATMAAN names and into the Russell 2000 (IWM) growth names.
There is still plenty of red on the screens, with around three decliners for each advancer, but the big difference is that the more severe selloffs are occurring in the big-caps while the small-caps are holding up relatively well.
It is premature to declare that many small-caps have bottomed, but we now have a more logical and playable bottoming process taking place. The major indices may need to come in more, and that will hurt sentiment but the action today shows that the stock pickers are becoming more interested and are starting to do some buying.
The DJIA is suffering its biggest loss of 2021, and the Nasdaq has its first five-day losing streak. That is very good news for stock pickers. We need the indices to move in tandem with the majority of stocks so that support levels can build and overbought conditions can be reduced.
Correlated selling and corrective action always eventually lead to better stock picking. We are seeing some signs of that today, and with a slew of earnings reports coming up in the next few weeks, it is likely to continue.