The corrective action that started in early September has been playing out in various forms for more than three weeks now. For the second time during that period, the selling intensified and produced a sharp drop in broad selling. The drop was sharp enough for the Nasdaq 100 to undercut the lows it hit on Monday, Sept. 20, but the Russell 2000 has held up relatively well and is still substantially above the levels that it hit on that day.
This is a rotational correction that is allowing the gap between big-cap growth names and secondary stocks to close. The small-caps topped out back in February and underwent a very ugly correction. It was even worse because it was mostly hidden. The indices did not reflect what was going on, and the folks in the media were mostly blind to it.
In recent weeks, the big-cap technology and growth names that led the indices to a series of new highs have been correcting while many of the secondary stocks have seen decent relative strength. A good illustration of the stocks that are under the most pressure is found in the Innovator IBD 50 Fund ETF (FFTY) . These are the top 50 stocks as chosen by Investor's Business Daily; they are primarily very high-growth names with strong relative strength and they are trading near their highs. On Tuesday, that ETF dropped 5.4%, and every stock was in the red. Names such as Inmode Ltd. (INMD) , Affirm Holdings (AFRM) , Asana Inc. (ASAN) and SiTime Corp. (SITM) dropped more than 10%.
This sort of corrective and rotational action is not unusual. It occurs periodically and deals with the excesses that regularly develop. The thing that was most notable about the action Tuesday was that growth names were much worse than other areas of the market, which reflects the market simply realigning valuations.
There is a bounce taking hold this morning and we will see how well it holds up. Intense selling like we had on Tuesday usually isn't resolved that quickly, but this is a market inclined toward dip-buying and we will see how much interest develops.
The debt ceiling is going to remain an issue for a while longer. That is creating some of the nervousness, although these things are always resolved at the last minute. This issue is impacting bonds and interest rates and that is spilling over into equities.
The quarter comes to an end on Thursday and there will be pressure to mark things back up. I expect to see support develop quickly.