One of the biggest bearish complaints about the market in recent months was that the positive action was driven primarily by a small group of big-cap technology names that were becoming both overvalued and technical extended. The argument was that this action was unsustainable and would end badly.
On Thursday, earnings from Microsoft (MSFT) and Tesla (TSLA) came in ahead of expectations but triggered a classic "sell the news" reaction. This spilled over to other momentum stocks and pushed the Nasdaq down 2.3%, which was its biggest loss since June 26.
Typically, this sort of selling leads to a broad market selloff, but that was not the case this time. The Russell 2000 outperformed and even produced a gain of about 0.1%. Value stocks such as banks and consumer staples saw inflows.
This was more of a rotation out of the most extended and expensive stocks and into other areas of the market. Usually when recent leadership suffers to this degree everything drops in tandem, but under the surface the interest in stock picking continued.
One of the major themes of the market recently is stock picking by retail investors and traders. While they stepped aside to some degree on Thursday, they didn't rush for the indices. They continue to look for value and attractive technical setups, which are primarily in the small-cap names.
The action here on Friday will be important as it will inform us about whether this shift in character will accelerate. The primary danger is that the rotation out of the FATMAANN names -- Facebook (FB) , Apple (AAPL) , Tesla, Microsoft, Amazon (AMZN) , Alphabet (GOOGL) , Netflix (NFLX) and Nvidia (NVDA) -- will start to impact the broader market and will cause correlated selling.
The poor reaction to Intel's (INTC) earnings and a slew of downgrades is adding to the pressure again, but that money is rotating into Advanced Micro Devices (AMD) and other chip names that are benefiting from Intel's woes.
The big danger is more correlated selling. My game plan is to focus on my individual positions and see how well they hold support. There are some small-cap names that should benefit from rotation, but to what degree is the big question.
This is a tricky environment, but it very mixed with a bearish bias. Opportunities should develop, but some patience will be needed.