The market was set up well for corrective action on Monday, and worries about the surge in the Delta variant of COVID provided a good excuse for aggressive selling. For weeks stocks has been struggling with a variety of potential negative catalysts such as higher inflation and interest rates, supply and labor shortages, and slowing growth but it was renewed COVID concerns that finally triggered the selloff in the indices.
In addition to the macro news flow, the very dramatic rotation action that has been taking place all year has been hitting extreme levels recently and was due to reverse. For a couple of weeks, the indices have been hitting new all-time highs on very lousy breadth and poor action in small-caps. That reversed to some extent Monday as biotechnology, growth stocks, and several other struggling sectors showed very good relative strength while the DJIA dived more than 2%.
In many respects, the action Monday was a rerun of the standard COVID trade. The stocks that did best, such as Peloton (PTON) , DoorDash (DASH) and Moderna (MRNA) , were the safe-haven names when COVID was raging.
There are some real concerns about the rising number of COVID cases, but this is not likely to be a replay of what happened in 2020. There are now very effective vaccines, people are very aware of how to deal with the challenges, and the determination to reopen is unlikely to be deterred very easily.
I suspect we will see a "COVID fears are overblown" rally/bounce fairly fast. The more negative it is in the short term, the more energetic the bounce will be.
For now, we will need to deal with this rotational action. We have COVID plays, growth, value, small-caps, and large-caps dancing around and dealing with shifting flows of interest. Earnings are going to be in the forefront for the next few weeks, and that will create additional volatility.
The good news is that the severe disconnect between the indices and some small-cap groups like biotechnology reversed Monday. That doesn't mean it will be smooth sailing, but there is recognition that the selloff has gone too far in places. This should help stock-picking, but the macro pressures will likely pursuit.
We have a little rebound Thursday morning, and we'll see how that holds. I'll be looking for some follow-through in groups such as biotechnology and gambling and will try to put more cash to work in names that are finding support areas.
Right now, COVID fears are driving the headlines and providing a good excuse for some necessary corrective action. Eventually, the market will conclude that it overacted, and we will see a significant bounce. It is all about the timing.