The major indices continue to hide chaotic and rotational action in many areas of the market. The shift in the market is being caused by both valuation and technical concerns and also by increased optimism that the Covid-19 crisis may be slowing.
A new simple test from Abbott Labs (ABT) shook up many stocks leveraged to the Covid-19 pandemic on Thursday and seems to have signaled a move from stay-at-home stocks to open-the-economy names.
This rotational action is not only driven by Covid-19 but is also a function of the narrowness of the market and the differences in valuation between "growth" and "value" stocks. The growth names are dominated by the seven FATMAAN stocks and have become a safe haven as their upward trajectory seems to be a far safer bet than anything else.
What will be of particular interest now is whether the stock splits of Apple (AAPL) and Tesla (TSLA) , which occur after the close Friday, will trigger a change in the action. In addition to these major shifts there is also a rebalancing of the DJIA that takes effect at the open on Monday morning.
These changes require some major moves by both indices and ETFs. The action will have nothing to do with fundamentals or valuations and it is extremely hard to game how it will all shake out after the moves are made and things settle down next week.
In addition to these moves in the market giants, there is also shifting action in small-caps and speculative action. Sectors that led off the March lows such as biotechnology and precious metals have lagged recently and value sectors like financials have been unable to develop any sustained momentum.
It is chaotic action but with the indices hitting new all-time highs again, it has been a major mistake to keep trying to anticipate a turning point.
On Thursday I took stops on a number of Covid-testing stocks and reduced some other positions that have been performing poorly. My cash levels are higher than they have been in a while. While I'm not bearish I find that I need to shift my exposure to better deal with the rotational action that is taking place. The stock-picking has become narrower but trades are still working.
As I've said many times recently, I will be concerned about the market when we start seeing more correlated selling. Breadth has been weak but it has not risen to levels that are a major concern. There is still plenty of liquidity out there looking for a place to go and that is preventing the correlated selling that will produce the sort of correction that bears are anticipating.
We have another solid open on the way but the big question Friday will be whether anticipation of the big stock splits triggers some strategic moves by traders.