After two days of aggressive selling, small-caps and growth names managed a lively bounce after a poor open on Thursday. This has been a particularly brutal week for small-caps, which went bidless on Tuesday and Wednesday, but the intraday reversal on Thursday had many market participants breathing a sigh of relief.
The correction action can be blamed on several factors. First is the recent concern about interest rates and inflation that cause pressure on bonds. The reopening of the economy and a spurt of growth has caused some concerns as market players repositioned for the shifting economy.
That leads to the second issue of concern lately, which is rebalancing as the quarter comes to an end. Small-caps have been the leading sector for a bit while the FATMAAN names have struggled. Large funds have become overweight groups such as small-caps due to price appreciation. These funds tend to engage in abrupt repositioning on a quarterly basis, and that was most likely what hit many stocks this past week.
What was most notable about the small-cap selling was how correlated it has been. Solid fundamentals offered no protection for most names as they were dumped without mercy.
Another factor that came into play this week was the poor action in themes that have been leaders during the recent run-up. Special purpose acquisition companies (SPACs), bitcoin-related and cannabis names were all hit hard for different reasons, and that caused pressure on speculative sentiment.
There are still a few more days of trading before the quarter comes to an end next Wednesday, so there could be some reverberations as repositioning and rebalancing continue, but at least one major broker believes that most of it is done now.
Is the worst now over? It is premature to sound the all clear, but we do have some clear support levels to watch now at the lows that were hit on Thursday morning. If they are retested it will cause some concern, but bulls are optimistic about the market's inclination toward V-shaped bounces.
The recent correlated selling makes it very hard for stock pickers, but plenty of good stocks have been unfairly punished and they will offer opportunity as the correlated selling pressure comes to an end. I'll be hunting for places to put some cash back to work.
We have a mild open on the way as market players are still feeling uncertain after the brutal action this week.