Stocks in China have been ripping higher recently due to indications that China's policy was to be highly supportive of the stock market. Last night China's GDP numbers came in stronger than expected but retail numbers were a little light. This sparked a "sell the news" reaction and raised some concerns about how accommodative authorities would continue to be. The Shanghai Index fell 4.5%, which is the biggest drop since February.
That negative response is spilling over around the world Thursday, with U.S. markets indicated lower in the early going. The brunt of the selling pressure is focused on the large-cap technology names that comprise the Nasdaq 100 ( (QQQ) ETF). This group has been lagging since the intraday reversal on Monday and is indicated lower by about 1.5% Thursday morning, versus the S&P 500, which is indicated down about 0.6%,
This is a convenient catalyst for some much-needed profit-taking but is it a sign of a more significant shift in the market?
Quite a few market strategists have been looking for a rotation out of growth stocks, such as the FAANG names, and into value stocks, like banks and industrials. The gulf in valuation has been growing and is now at extreme levels. The big issue is how does that gulf narrow?
It is likely that the gap will narrow by declines in the growth names more than by increases in value names. This is not how bull markets tend to operate. There will not be a seamless rotation from FAANG stocks into stodgy value groups such as consumer staples.
We need to monitor this rotation action carefully and if it picks up steam it is very likely to be an issue for the indices. The Nasdaq and Nasdaq 100 have been leaders and they can easily turn into laggards as the DJIA is more heavily driven by value names.
My main focus continues to be individual stock-picking. I will be much more concerned about the overall market if there is correlated selling again. When the market falls apart it tends to be index driven, similar to what happened in February and March. All stocks sell off in tandem and their individual merits become irrelevant.
Right now we have just the opposite with very strong breadth and leadership in small-caps due to stock-picking and speculative interest. When those "hot pockets" of stock-picking disappear and stocks start moving in tandem, then it will be time to worry about a more significant market drop.
Market timers are not fully appreciating how speculative trading is changing the character of the market's actions. They are too focused on valuation and macro arguments and are missing the great power that exists in positive sentiment. This positive sentiment is being dismissed as unjustified but it is not going to disappear easily.
Bears that are looking for a sudden market collapse are likely to be disappointed again. There is some much-needed selling in the Nasdaq 100 but this is primarily just healthy consolidation in the context of a good market for the trading of individual stocks.
