The S&P 500 and Dow Jones Industrial Average softened on Tuesday, but the divergence between growth and small-cap stocks and the indices continued to build. Small-caps lagged again with a loss of 1.2%, and many growth names were hit hard. Around 380 stocks sold off on heavy volume versus just 100 that advanced on improved volume.
The dilemma of this market continues to be the huge disconnect between the indices and the majority of smaller stocks. It looks like a growling grizzly bear of a market for small-caps, but the indices continue to shrug off the horrible breadth and the selling pressure.
Traders are scratching their heads trying to figure out how this market will resolve itself. If the indices finally do correct deeper, are they going to drag down stocks that already have seen substantial declines? Is it possible that there will be rotation into stocks that have been lagging badly while the indices struggle?
Typically the market does the unexpected, and I suspect it is likely that this two-tiered market eventually will reconcile itself in a way that isn't well-anticipated.
On top of the wildly inconsistent market action, we also are dealing with negative seasonality and peak vacation time on Wall Street. Many market players just aren't interested in doing much until after Labor Day.
In the meantime, the biggest danger in this market is to be too aggressive with bottom fishing in stocks that seem like good values. Many great stocks have been hit hard and are languishing, but that doesn't mean they are going to come roaring back right away.
The thing that probably would help to clear the air more than anything is a deeper correction in the indices, but it just isn't happening right now. This is a very tough trading market and will require some patience as it deals with a variety of issues.