On Wednesday big-cap technology stocks moved sharply higher led by strength in software and "FATMAAN" names. Much of the market did not follow. More than 60% of the stocks in the market declined while the Nasdaq and S&P 500 were hitting new highs.
A variety of rotational action has been taking place for a few weeks now and is very likely to continue in the near term. The bears have been frustrated because they are unable to capture downside since the rotation helped to hold the indices steady. One day the big-cap growth names are helping to hold the indices steady and then the next day it is "value" stocks and other lagging sectors that pick up the slack.
While certain areas of the market are quite extended and expensive there are major areas of the market that have not participated in the huge run off the March lows. The strength has been driven by a few big names such as Apple (AAPL) , Amazon (AMZN) and Tesla (TSLA) . Those stocks have created the misconception that the entire market is wildly extended and in bubble-like conditions.
The likelihood is that there will be some corrective action but it will take place primarily through rotation. There is still plenty of liquidity out there that wants to own stocks and it will find other opportunities if the big-cap technology names take a rest.
It isn't just valuation that is likely to drive rotational action. There is news of new developments in testing for Covid-19 from Abbott Labs (ABT) , the likelihood of a vaccine by December, and a decline in the pace of new Covid cases. It is likely that the move to reopen the economy will continue to accelerate and that there will be movement from the Covid "safe havens" and into other stocks that have suffered the most due to stay-at-home restrictions. Amazon and Apple were the "safe" stocks to own as the Covid crisis raged but now there should be a rotation into other groups that have suffered, such as airlines, travel, restaurants, and retail.
The most important issue right now is to not focus too much on the indices. The main movement in this market is occurring under the surface. To navigate effectively the focus should be on rotational action. This is not easy since it seems to shift on a daily basis but it is even harder if you keep trying to capture the movement by shorting indices.
We have a little early weakness and it will be interesting to see how well the big-cap technology names can build on momentum. Saleforce.com (CRM) is currently indicated down about $2 after a gain of $26 on Wednesday.