Stocks are set for a mixed start here on Monday morning as the battle between higher interest rates and a strong economy continues. The market has been struggling to deal with inflationary fears and has been skeptical of comments by Federal Reserve Chairman Jerome Powell that inflation would be "transitory" as the market ramps back up to where it was prior to the Covid crisis.
Higher interest rates combined with the reopening of the economy have created substantial rotational action, but there are some signs that market players are trying to sort out those stocks that will benefit from robust economic growth to a greater degree than they will be punished by higher interest rates.
The challenge of the market lately has been that the interest in stock picking has not been sustained. Each time stocks look ready to run, they have been hit by renewed interest rate concerns. Technology stocks have borne the brunt of the damage, but there are some signs that support is developing.
The thing that has been working best recently has been focusing on themes such as non-fungible tokens (NFTs), gambling and select small-cap names.
As I discussed last Friday, there are two themes that I'm looking at over the next month or so -- cannabis and special purpose acquisition companies (SPACs). Cannabis, especially the over-the-counter (OTC) names, should benefit from increased speculation that the Senate is ready to advance a cannabis bill. SPACs are so washed out now that many are trading near net asset value and have little downside risk. Market players are showing an increased interest in trying to find the winners that may emerge.
The market could use some mild action at this point. There have been rotations on a daily basis and it has created several bull traps just when it looked like momentum was growing. The good news is that there still seems to be a strong appetite for speculative interest
My plan is to stay focused on stock picking as I manage my existing positions. I don't see much edge in trying to predict index movement, especially when there is such a wide divergence between the Dow Jones Industrial Average and the Nasdaq 100.
