Corrective action picked up again on Thursday as the computer algorithms went to work with rotational programs. This was at least the third time in the first two weeks of the New Year that the computers went to work selling growth, small-caps, biotechnology and other interest-rate-sensitive names and buying value, industrials, commodities and financials.
These computer algorithms are unforgiving if you are on the wrong side of the action as they sell anything and everything within a sector. The merits of an individual stock will not matter if the sector ETFs are being sold. A good example is biotechnology as represented by the SPDR S&P Biotech ETF (XBI) , which was hitting new lows Thursday.
For many months I have been writing about the wide gulf of performance between big-caps and the indices on the one hand and many secondary and growth names on the other. It has been a tale of two markets for a long time, and now there is a titanic struggle as the traders wrestle with closing the gap.
The irony of this market is that if the indices reflected the action in the vast majority of stocks, then everyone in the media would be talking about the bear market and how it already has fully discounted a hawkish Fed and higher inflation. Folks would be trying to predict a turning point to the upside rather than the downside.
Unfortunately, there isn't any simple and easy way for the gulf in performance to close. It is even more difficult when we have rotational action and higher interest rates thrown into the mix.
Many traders are tremendously frustrated that even after a downtrend that started back in February 2021, stocks in sectors such as biotechnology and growth still can't seem to find good support. They are at the mercy of computer algorithms that don't care about fundamentals and a rush to reduce big-cap exposure.
It is an extremely challenging market environment, but now we have some earnings reports to mix things up. Banks are reporting here on Friday morning and have some solid beats, but the reaction to JPMorgan Chase (JPM) is very negative so far.
The indices are indicated lower, but so far, the selling is mild.
