The recent rotation that has been the primary market action for weeks deepened on Monday morning as the technology and growth stocks that dominate the Nasdaq and Nasdaq 100 came under pressure once again.
The DJIA continued on its steady run higher and hit a new all-time high, but the poor underlying market conditions just couldn't be ignored for long. The DJIA lost its momentum, selling picked up, and by the end of the day, it was giving back all its gains.
The intraday reversal in the DJIA is classic topping action, and Tuesday morning it looks like the turnaround will be confirmed with a gap-down open.
Traders have been having a tremendously difficult time navigating this market as value and low-growth stocks become more extended. In contrast, the growth and speculative favorites have fallen into a bear market. The gap between the two groups has been growing for weeks as market players scratch their heads and wonder how it will eventually be resolved.
Essentially, what has occurred is that speculative liquidity has disappeared. Small, individual traders have given up, and the names that stock-pickers and aggressive traders favor have fallen apart and are struggling to find support.
There are still some inflows, but these funds are going into areas of the market that traders don't trade much. Names such as Dow Inc. (DOW) are not on the radar of the small trader looking for some action.
The big question now is how this market deals with this huge gap that the vicious rotation has created. Many growth names and small-caps are already deep into bear markets as they have corrected 30% or more. On the other hand, the senior indices have barely seen a blip.
Probably the best way for the market to resolve this issue is for the DJIA and S&P 500 to correct. We saw some of that Monday afternoon, and it looks like it will continue Tuesday morning. This is what is needed to shake things up and give us the correlated selling to produce some sort of capitulation.
This is an extremely tough market as oversold stocks become more oversold, and overbought names stay overbought. The process of closing that gap is not going to be easy.
The best approach here is to stay patient, protect capital and wait for the process to further play out. More downside action is probably the healthiest thing that can happen at this point.