The Dow Jones industrial average and S&P 500 finished the day with minor gains, but we had some of the most unusual action that I have seen in 25 years of trading.
The day started with pure panic. A meltdown in bitcoin, a rotation into the "reopen the economy" names, and a breakdown of a key special purpose acquisition company name helped to trigger a rush for the exits. It was the most panicky selling that we have seen since the COVID crisis back last February and March.
The dip buyers were too scared to show up at first, but they finally went to work and produced a decent bounce. That bounce fizzled, but an afternoon run took the indexes back up and helped to cover up some real carnage under the surface.
It is not that unusual for the indexes to reverse back up, but what was unusual was how hard many individual stocks were hit during the day. Breadth finished at around 3,000 gainers to 4,800 decliners, but anything crypto-related and many SPACs suffered substantial losses and did not bounce along with the indexes. The list of stocks with significant losses was many times longer than the list of stocks that were up 10% today
In recent months we have seen the inverse of this action several times, where small-caps have done extremely well while the major indexes looked quite poor. I have been quite vocal about how individual stock picking has worked so well for so long. The stock picking worked pretty well again today, but it was narrow and not in the same stocks that it was before.
The selling this morning was the first real correlated selling that we have seen in a long time. It hit without regard to fundamentals or valuations, and some of the better names did bounce back very well, but others did not. It was very uncorrelated the way that things bounced back in the afternoon, which made trading quite difficult.
The good news is that this is the sort of shakeup that should lead to some new setups, but there are likely to be more reverberations before it is over.
One big change in the market in recent years is the speed at which corrective action takes place. The fall from the highs when the COVID crisis hit last year was the fastest ever, and the panic and bounce that occurred today was also within a very condensed time frame. What used to take a week now seems to occur within a matter of a few hours.
I raised my cash levels quite a bit and moved to assure a high level of flexibility going forward. While a "V"-shaped bounce seems like the most logical move after today's action, I would not be surprised to see more chaotic trading in the next few days.
Have a good evening. I'll see you tomorrow.
