Much weaker than expected jobs news last Friday and much higher than expected inflation news on Wednesday morning is a one-two punch that has finally triggered some aggressive corrective action in the major indexes.
The Dow Jones suffered its biggest loss since late January, but it was the Nasdaq that took a harder hit with a loss of 2.67%. Breadth was very poor, with around 1,150 gainers to over 6,750 decliners. Support levels were breached, and there were no safe havens to be found.
It was inevitable that the vicious rotational action would eventually produce some sort of reaction in those names that have been holding up so well. It just wasn't feasible that the gap between the strong value names and weak growth names could continue to build.
It is very ugly out there, but the positive spin on this action is that we now have the sort of correlated selling that will eventually give us a tradable low. The stocks that have been in a bear market for a while now can finally start to look for support, as their big-cap brothers start to break down.
We had to purge the excesses, and that is what is happening now. We have downside momentum in place now, sentiment is terrible, Volatility Index is expanding, and growth stocks are hated. That is exactly what we need to get this corrective action over with and some better trading action in the near future.
I'm not going to try to guess how deep this corrective action will go, but the process is well underway, and we just have to be patient and vigilant. Many stocks are already deep into bear markets and show some minor signs of support. Biotechnology, for example, had some relative strength today.
Although it is painful for many market participants, I am relieved to see more correlated selling. It has been the missing ingredient for an effective correction.
Have a good evening. I'll see you tomorrow.