On Tuesday, market participants celebrated an energetic bounce in the indices after a panicky open, but the action covered up some very poor action under the surface in a variety of stocks that have outperformed recently.
Bitcoin-related names, high momentum stocks held by the ARK funds, social media-supported small-caps, SPACs, and a variety of other names that have been leaders for weeks did not recover nearly as well as the overall market.
This corrective action is the natural consequence of excesses and needs to occur periodically to help develop better technical conditions. Ironically this selloff was triggered by signs of a strong economy as the rollout of the COVID vaccines continues, and optimism about a return to "normal" takes hold. The recovery is proceeding so well that it is causing concern about inflation, but Fed Chair Powell was successful in reducing some of those worries in his congressional testimony Tuesday. Powell appears before the Senate Wednesday morning and should continue to reinforce his market-friendly views.
The action on Tuesday caused frustration for prudent traders that were forced to take some stops due to the intense selling. However, the bounce that ensued was uneven. Not everything came back that strongly and there is quite a bit of technical damage. This is due in large part to the rotational nature of the action, with some of the "reopening" stocks stepping up while big-cap technology and FATMAAN names continue to struggle.
Conditions are now good for a return to the focus on stock-picking that has characterized this market for quite a while. ARK funds have quite a bit of impact on a number of the leading names as ARK saw the biggest outflows in its history. Nonetheless, Cathie Wood is still buying and is sending Tesla (TSLA) , Butterfly Network (BFLY) , and several other names higher this morning following news of its moves on Tuesday.
Bitcoin also sees an energetic bounce this morning following news that PayPal (PYPL) has parked more capital in the cryptocurrency. The fears created by Janet Yellen are being shrugged off, and traders are quickly jumping back into the fray.
After the chaotic action on Tuesday, I am looking for a renewed focus on stock-picking. We already have some good action in a variety of individual stocks, although the indices are quite mixed and not doing anything very impressive.
This has been a great market for individual stock-pickers for quite some time. The market timers finally had a couple of days of action, but if they were not extremely quick and very precise, it is unlikely they did very well.
I'll be looking hard for some news buys Wednesday morning as the return to stock-picking is showing some very favorable signs so far.