For the second day in a row, the action under the surface was extremely chaotic, while the indexes traded quite mildly. A late buy program jammed the indexes to the highs of the day. These late-day programs are very common, but the one at the close Tuesday was particularly aggressive and had the S&P 500 briefly in positive territory.
Small caps exchange-traded fund (IWM) outperformed and the Dow Jones industrial average was close to flat, but aggressive selling continued in momentum stocks and most things favored by hedge funds recently. The IBD 50 ETF (FFTY) , which is comprised of momentum stocks, suffered a loss Tuesday of 2.9%, which means it is now down 5.7% in two days. This is equivalent to the Dow losing a jaw-dropping 1600 points, which is particularly remarkable when compared to the Dow, which is up 106 points over the same two-day period.
It isn't just momentum stocks that are being hit. Other, more conservative, winners like Visa (V) , Starbucks (SBUX) and Disney (DIS) are also under pressure. Even bonds, which have been favored recently, have seen a sharp reversal in momentum.
This has been some of the most mixed action we have seen in years and it undermines all logical bull and bear narratives. The only logic lately is that everything that has been leading in recent months is getting sold. There is no obvious fundamental reason for this to occur to this great degree right now, but it is feeding on itself.
The more important question is how this resolves itself. Do the weak momentum names drag down the rest of the market or does new upside leadership emerge, while the momentum stocks try to find support? These scenarios have not been contemplated by the big-picture pundits that have been predicting moves in the major indexes, rather than huge rotation between sectors.
The good news is that chaos usually leads to more opportunities. We just need to stay focused and look for the best entries. Sooner or later, there will be high-odds trades.
Have a good evening. I'll see you Wednesday.