The corrective action that started in early September picked up steam Tuesday.
Dire warnings about the consequences of not raising the debt ceiling combined with a spike in interest rates and oil prices helped sour the mood. This is also one of the worst weeks of the year seasonally, which is probably self-fulfilling to some degree.
We will see plenty of headlines about how ugly it was on Tuesday. Breadth approached seven-to-one negative, and new 12-month lows expanded to over 200, but the selling pressure was much worse for big-cap technology names than for other areas of the market. The ARK Innovation ETF (ARKK) , which is a good proxy for high-beta growth names, lost almost 4%, and the Innovator IBD 50 Fund ETF (FFTY) took a hit of 5.7%. Both those ETFs tend to hold expensive, high momentum, high growth stocks, and they were hit the hardest.
Although there was plenty of bleeding in some of the small caps, they were not pummeled to the same degree as some other areas of the market. The main reason for this is that many of them have already undergone very severe correction action starting back in February and are now struggling to find support. It is hard for small stocks to move counter to the major indexes, but there were some signs of that inclination today.
Overall this is a healthy and routine corrective action. The big caps are catching up with the small caps to the downside, and that is helping to work off some of the most extreme excesses that have developed. There is no way to know how much longer or deeper this correction will go, but the process is playing out, and we just have to stay patient.
I feel quite optimistic that this action is going to lead to a good setup for third-quarter earnings and the end of the year. I suspect the debt ceiling issue will be resolved or pushed back, and that will give us a pretty quick relief rally. Also, the third quarter ends this week, and there is likely to be some effort to shore things up for the final accounting.
Have a good evening. I'll see you tomorrow.