The most notable characteristic of the market recently has been the rotational action. The senior indices and big-caps have been the primary beneficiaries of this tendency, but there have been several occasions in the past few weeks where small-caps, growth stocks and speculative names suddenly have come alive.
Thursday was another one of those days where the pressure suddenly lifted on the stocks that have struggled the most and traders were not only breathing a sigh of relief but celebrating some very strong action. The Russell 2000 ETF (IWM) enjoyed a surge of 1.8%, the ARK Innovation ETF (ARKK) was up 1.9% and groups such as cryptocurrencies, gambling, biotechnology and cannabis all enjoyed lively action.
Twice in recent weeks, action of this sort fizzled out quickly. There was some brief follow through and then the big-caps and indices resumed their outperformance on poor breadth. There has not been any sustained recovery in many of the secondary stocks and that has been a source of much frustration.
The big positive for many of the secondary stocks right now is that they generally are not technically extended and have some good support levels. Unlike the big-caps and indices, they are far from the highs hit back in February and are not nearly as stretched. That hasn't mattered much to this market, which has taken comfort in chasing relative strength, but if there is a move back toward more stock-picking it should help.
It is important to keep in mind that we are now in a slow period seasonally and we are likely to see some of the lowest volume of the year in the last couple weeks of August. Liquidity might be an issue, but it is important to monitor the pockets of momentum and watch the themes that are working.
We have a very mild start setting up and we'll see quickly how momentum is developing.
