For several months now, the key to effectively navigating this market has not been the indices, the economy, earnings, or news flow. The key has been understanding and embracing the liquidity as it flows into various sectors and themes, particularly small-cap stocks.
It has been a fantastic market for stock-picking since August. The FATMAAN names led to a narrow market recovery off the March lows, but the buying spread to the broader market and to lower-priced small-caps in part due to the inflow of stimulus payments.
This stock-picking action has created exceptionally strong action in sectors such as SPACs, biotechnology, solar energy, bitcoin (GBTC) , energy, and highly-shorted stocks. The big-cap FATMAAN names have generally lagged, and earnings have not revived them other than Alphabet (GOOGL) , which jumped Wednesday.
This focus on stock-picking in certain sectors has created the impression that the market is frothy and that bubbles are forming in certain places, but there has been a good amount of rotation that has kept things in check.
Last week the social media short-squeeze frenzy helped to create some much needed corrective action. Favored sectors such as SPACS have come back extremely well as the retail money keeps looking for places to go as the short-squeeze trade fizzled.
Many market pundits and participants are concerned that this action is excessive and it will come to an abrupt end, but they seem to be underestimating the liquidity that is chasing elements of the market. And there is the likelihood that liquidity will receive an additional boost as stimulus payment negotiations progress in Washington.
My strategy for this market is not complicated. I'm going to stick with a focus on stock-picking, cut losses quickly, and focus on keeping accounts as close to all-time highs as possible. When I stop finding stocks to buy, my cash levels will quickly increase as I sell down more positions.
I have absolutely no desire to try to predict when the indices might top. I'm focused on all the great trading in individual stocks in hot sectors and will stay with it as long as it is working.
We have a flattish open on the way as the market digests more earnings news.
