For much of the last six months, the major indices have failed to fully reflect the extremely strong action in small-caps and speculative stocks. There was a surge in higher-risk names in part due to a wave of liquidity and growing interest of small-retail traders. It was a great environment for aggressive traders and stock-pickers.
Those stocks that were favored by traders are now undergoing a sharp correction. Many individual names are more than 20% off recent highs and already deep into a bear market. The carnage is quite extreme in places, but many casual market observers glance at the DJIA and S&P 500 and proclaim that "the market has barely corrected."
This is another good example of the adage that it is a "market of stocks and not a stock market." It also illustrates the cyclical nature of the stock market -- there is constant rotation as various stocks fall in and of favor.
This sort of rotational correction action can be quite difficult for traders to navigate, but it has been the norm since the last major bear market in 2008-09. While the major indices have not had protracted and deep bear markets, almost all sectors of the market have experienced one at various times.
A good example of a rolling correction are the FATMAAN stocks. After leading the market off the bottom in March 2020, they peaked around August and have done nothing for nearly seven months. Take a look at the charts of Amazon (AMZN) and Facebook (FB) , for example -- both are still below their August lows and have been consolidating for months.
Small-caps and more speculative stocks are now experiencing the same sort of rolling correction. One of the easiest ways to see what is happening to a key sector of the market is to look at the ARK Innovation ETF (ARKK) . This ETF held the leading high-momentum growth names while the FATMAAN names were correcting, and it is now around 27% off its February highs, which by any definition is a bear market.
The question now is how much longer will this play out? Many small stocks have been demolished and are looking for support, but traders have lost confidence in bottom-fishing and are in no hurry to jump in. Eventually, this area of the market will find support, and the stock-picking will reward aggressive traders again, but right now, we are in the teeth of bear market action in small, speculative, and Nasdaq growth stocks.
There is little to do here right now but focus on capital preservation and stay patient for signs of stabilization. The good news is that much of this activity is driven by reallocation and repositioning that hits at the end of the quarter. Big funds that are shifting exposure don't care much about stock-picking. They will dump the groups that are out of favor without regard to the merits of individual stocks. This will eventually lead to opportunities, but the timing is not easy.
We have some minor bounce Thursday morning, but early strength has not lasted recently, and traders lack confidence.
I'll be out most of the day. Good luck and go get 'em.