The market flashed some warning signs on Tuesday as strong rotational action faltered and turned into a late-day selloff. Breadth went from about 2-to-1 positive early in the day to 2-to-1 negative into the close as the inflows into value stocks, small-caps and other groups suddenly stopped.
The selling pressure on growth stocks continued for a third straight day. The ETF that tracks the growth stocks favored by Investor's Business Daily, Innovator IBD 50 (FFTY) , dropped 2.3% on Tuesday and is now 5% under the highs it hit last week. Similar selling has been taking place in FATMAAN stocks.
Overall, this sort of rotational action tends to be healthy as it allows the market to digest gains and new leadership to emerge. There have been a number of rotational corrections in the last decade that have helped to prevent big selloffs in the broad market indices.
A collapse in precious metals and miners was another aspect of the rotational action that bit bulls that have become quite confident in a sustained uptrend.
While many market players are looking for news catalyst to explain this action there really is nothing. A split of Tesla's (TSLA) stock, Joe Biden's VP announcement, vaccine news and continued growth in Covid-19 cases are receiving much coverage, but this market is driven primarily by big shifts in assets more than anything else. It is a strategic decision after a good run and is done in anticipation that the economy will start to shift as the Covid-19 situation moves to the next phase.
If the bears can produce some downside follow-through here on Wednesday it will change the character of the market. But, as is so often the case, the market quickly reverses and suddenly we have a short squeeze and fear of missing out driving the action again.
We'll see how well this gap-up open holds this morning. Another poor finish today is going to give the bears some confidence, but they still have a lot to prove if they are going to turn this market to the downside.
I will continue to focus on stock picking, but I've raised my caution level and will be more aggressive with my defense.