The corrective action that has been plaguing growth stocks, speculative small-caps, and various other areas of the market for months has finally spilled over and is hitting the major indices. The vicious rotational action largely ignored by the business media is now being recognized as value names, and other big-caps have dropped sharply.
Both the S&P 500 and DJIA tested their 50-day simple moving averages for the first time since March. This is a relatively mild pullback compared to other sectors of the market, but it does start to close the gap that had been growing to extreme levels just a week ago.
There is no big mystery as to what finally triggered this action. Jobs news last Friday was much weaker than expected, and inflation news on Wednesday was much stronger than expected. More inflation data is expected this morning when PPI numbers are released.
While this market action is looking very poor, the positive news is that more correlated selling will help many stocks to find support levels. For weeks, many traders have been wondering how some sectors such as biotechnology, gambling, and EVs could bottom if the major indices were still hitting new highs. There have been ongoing bear markets in parts of the overall market, but they have not been recognized to the degree they normally would because of the misleading strength of the DJIA and S&P 500.
To add to some of the chaos this morning, Elon Musk posted a tweet that Tesla (TSLA) would no longer accept bitcoin as payment due to the environmental damage done by bitcoin mining. This has roiled the entire cryptocurrency market and is sending bitcoin, dogeCoin, and ethereum sharply lower. Speculative traders in equities have already been badly burned of late, and now those that have moved to cryptos are being hit as well.
The main story of this market has been that speculative liquidity has dried up. All the stocks that individual traders were trading aggressively have fallen sharply in the last couple of months. Stocks favored by buy-and-hold investors and more conservative funds have continued to trend higher while the secondary names have collapsed. There was still liquidity driving moves into things like banks and consumer staples.
The liquidity issue is now spreading into the more conservative sectors that held up the DJIA, and that is the issue we see now. These big-caps still have a long ways to go to catch up with the pounding that the speculative names have suffered, but at least the process is now underway.
Stocks are set for more selling this morning, but the bounce buyers are likely to be looking to jump in if there is some early panic. This is a very dangerous market right now. Stay patient and protect capital.