Since the market bottom in March 2020, there have been two primary market themes. The first is very severe rotational action, and the second is very sharp bounces after a correlated selloff.
We have a good example of the second theme on Tuesday. Stocks opened slightly higher and then steadily gained steam all day. The only index that did not completely recover all of its losses, at least temporarily, before some late selling, was the Dow Jones. The Russell 2000 fund (IWM) led the way with a substantial gain of around 3%, and that was reflected in breadth that was better than six to one positive.
Sharp bounces after a big selloff are not unusual, but what is unusual is that there are complete recoveries without any retests. The bounces happen so quickly that it makes it tremendously difficult to reposition if you are trying market timing. Any anticipatory bear that caught Monday's drop didn't have much time to lock in gains.
So now what? Was this bout of increased volatility enough to relieve some of the market excesses? The good news is that the big disconnect between the senior indexes and the majority of stocks has been disrupted. We no longer are seeing the indexes hit new all-time highs on negative breadth.
Another positive is that this action has shifted the focus back to stock picking. Many of the best bounces are in stocks that were unfairly sold in the vicious rotational action. It doesn't hurt that earnings are coming up quickly, and there will be more focus on fundamentals.
The bears are going to point out that the issue of COVID variants has not gone away, and there are now growing concerns. Bonds did reverse to the downside intraday, which is a good sign as far as economic growth, but how quickly will those inflation worries bubble back up again?
I'm hopeful we can focus more on stock picking after these big swings, and there certainly are quite a few interesting stocks to consider.
Have a good evening. I'll see you tomorrow.