The market enjoyed bullish action on Monday, with the Dow Jones Industrial Average and S&P 500 hitting new all-time highs, but there continued to be quite a bit of rotational action to make things challenging. Growth stocks regained their standing as market leaders as money flowed back into FATMAAN names and big-cap technology names that have been lagging for months.
Under the surface, small-caps and some of the hot themes such as special purpose acquisition companies (SPACs), cannabis, gambling and biotechnology struggled. Most of these groups topped in mid-February and have been struggling to generate fresh momentum for about six weeks now. There was some bottoming action in small-caps last week and the bleeding stopped, but the groups did not enjoy renewed vigor as the senior indices hit new highs Monday.
The primary question for market participants now is how this shifting rotational action will develop here. Are the FATMAAN names and big-cap technology stocks ready to regain their leadership? Will small-caps find support and start attracting aggressive individual traders again? What new themes and sectors are going to serve as leadership?
Earnings season is fast approaching, and that will determine how things develop from here. There should be some strong guidance as the economy continues to reopen rapidly, but how much of that already has been discounted?
We also need to keep an eye on bonds and see if higher interest rates and inflationary fears trigger another bout of corrective action.
Overall the market is in good shape technically, but it is the rotation under the surface that is presenting the most significant challenges. Stock picking has been struggling for about six weeks as the rotational action took place, and it was disappointing again on Monday. Market conditions overall are supportive, but we still need to be quite selective right now. It is very narrow for stock pickers, and we don't have any great themes working other than a rotation into big-cap growth.
We have a mild start here on Tuesday morning and we will see what develops. Monday's new highs did not have the frenzy that occurred back in February, and that may be a longer-term positive.
