Last week, bonds received the blame for the most severe corrective action of 2021. Not only were there inflationary fears and increased interest rates, but optimism about the reopening of the economy triggered rotation out of many big-cap technology names and speculative small-caps and into financials, hospitality, travel, airlines and other stocks that have suffered the most during the pandemic.
Here on Monday morning, stocks are indicated broadly higher as the yield on the 10-year Treasury note pulled back and investors took a more nuanced view of how a large stimulus bill would play out and of the potential for a steady strengthening of the economy as Covid vaccinations continue to roll out.
The corrective action last week was very correlated, which is quite typical when the indices are overbought and in need of a rest. Breadth was over 5 to 1 negative and the stock-picking that produced such good results for several months suddenly did not work as well.
The big issue this morning is whether this bounce is just a temporary reprieve that will be quickly sold or whether it is a support level that will provide a foundation for the next leg higher. Gap-up opens on Monday morning are an invitation for traders that bought the weakness to take some profits, but the more important issue is whether dip-buyers will jump in and help create some fear of missing out.
Many individual stocks have already corrected much more than the indices, so bargain hunters will be looking hard for entry points, but there are also some folks who are feeling trapped and will want to reduce positions if they have better exit points.
This market has had a tendency to come roaring back quite quickly since the March 2000 lows, and it can gain momentum very fast due to the increased interest from individual traders who are predisposed to buy and to keep on buying when momentum starts to build. Key social media stocks such as GameStop (GME) , AMC Entertainment (AMC) , Sundial Growers (SNDL) , Sos Ltd. SOS, Palantir Technologies (PLTR) and Churchill Capital Corp. IV (CCIV) are all producing gaps this morning.
I raised cash last week and reduced my positions, but I will be looking to put more cash to work as stocks develop this morning. The main things I'm watching for are the aggressiveness of the flipping into early strength, how fast dip buyers show up, and whether the indices can make higher highs that take out the opening highs as the day progresses.
Bitcoin had a very volatile weekend and should continue to move around sharply. I am slowly building a position there.
I see quite a few washed-out stocks that I believe are good values and I will be focusing on them.