The current market action is a particularly good example of the futility of predictions. While many pundits and experts were looking for a market correction to hit, none of them foresaw what we have happening now. The headlines are shouting about the great action and new all-time highs while aggressive traders are grappling with speculative small-caps and high-beta growth names that are exhibiting classic bear market action.
The indices often do a poor job of reflecting what is going on in the market, but the current situation is the most extreme that I have ever seen. The buy-and-hold, slow-growth value names are trending steadily higher while the high-growth, high-beta names than usually are the market leaders are taken out back and shot.
For a while now, I've been writing about the severe underperformance of sectors such as special purpose acquisition companies (SPACs), biotechnology, gambling, solar energy and high-beta growth. The big question has been whether this corrective action would spread to the broader market or whether these stocks would bounce and start to close the gap.
Rather than closing the gap, the gap has grown even wider this past week. The rotation has picked up steam as market players dump stocks such as DraftKings (DKNG) and Pinterest (PINS) and buy insurer Travelers Cos. (TRV) and Home Depot (HD) instead.
The question remains as to how this huge divergence eventually will reconcile itself. At some point the gap between the two groups will close, but the challenge is to find the trades that will benefit from that change. So far, there aren't any signs that the severe rotation is about to end, so the thesis for a closing of the gap doesn't even apply.
My game plan is to keep watch for potential catalysts that will shift this rotational action and then watch to see if it can gain some traction. Right now, bottom fishing isn't working and chasing value stocks at all-time highs holds little appeal. I see many names that I believe are oversold and have some fundamental support, but they are not working. It is a very tough trading environment.
We have a mildly positive open on the way, but that hasn't helped growth stocks very much recently.
