In recent weeks there have been two primary positives driving the market. The first has been the refusal to embrace a negative big-picture narrative and the second has been a focus on stock-picking and technical action.
Although hopes of a fiscal stimulus have been too optimistic and there has been a rising number of Covid cases both in the U.S. and Europe, the price action has stayed quite positive. Market participants that have stayed focus on picking stocks with good fundamentals and charts have been able to navigate some tricky rotational action quite well.
Stocks have struggled for the past couple of days, as they digest recent gains and deal with some rotation in and out of big-cap growth stocks and FATMAAN names. It's been a rather healthy consolidation so far but the negatives are gaining more traction Thursday morning and the indices are looking at a negative open.
France and the city of London are ramping up restrictions, but not imposing full lockdowns, as Covid cases continue to surge. The majority of states in the U.S. are also seeing increases, although due to better treatments, the death toll has not been rising nearly as quickly and that is allowing the economy to continue to reopen in most areas.
However, even with the economy reopening, delays in a vaccine and other treatments are going to slow down economic activity. Stocks have been generally optimistic about the future but as we enter earnings season some of the bullish views will be tested.
Thus far banks have been the primary group to report earnings and they have been quite lackluster. This is not a leadership group and has not been that important mainly because the pressure on the group is due in large part to low interest rates.
What is rattling the market Thursday morning is very poor guidance from Fastly (FSLY) , which operates a cloud platform. Its primary customer has been TikTok, which is struggling with various issues and not growing as fast as predicted. The stock is trading down nearly 30% in the very early going but the big problem here is the sympathy impact it may have on other expensive momentum stocks.
Much of the market has not been excessively valued but the most susceptible to valuation issues are the FATMAAN names and big-cap technology stocks such as CrowdStrike (CRWD) , Cloudflare (NET) , Datadog (DDOG) , etc.
One of the big positives about the market action lately has been the ability of certain groups and sectors to perform while others have been undergoing corrections. We saw small-caps do well while large-cap growth leadership was doing poorly, but the weakness eventually spread to the broader market. While it didn't' last long, we have to watch for broader, more-correlated selling without regard to the merit of individual stocks.
My game plan here is to be ready to take some stops if the selling pressure intensifies and then to be ready to remount some of my favorites as they find support. There are several names that I like into earnings reports but many of those reports are still a few weeks again.
Buckle up. It is going to be a bumpy ride.