All year long the primary challenge of the market has been rotational. There has been a series of corrections, but they occur only in portions of the market at various times. While the Nasdaq is just two days from all-time highs, only 35% of all stocks are above their 40-day simple moving averages and less than 60% are over their 200-day simple moving averages.
This illustrates how stocks have not moved in a correlated manner, rather than in a correction where there is broad selling and a decline in the indices. We have often seen broad selling and an increase in the indices.
The disconnect between the indices and the number of stocks that are acting well makes a mess of sentiment and prevents the sort of corrective action that leads to solid support levels. How can the market effectively correct when Amazon (AMZN) and the Nasdaq 100 keep hitting new highs, but 40% of individual stocks are in a bear market?
It is a difficult situation for stock pickers who believe their stocks should be doing better simply because that is what they see in the indices and hear in the media.
An additional complexity is how the market is struggling with shifts in interest rates. We have gone from an environment where worries about inflation and interest rate threatened to push the market into a downtrend to one where the 10-year Treasury is down to 1.29% and is reflecting growing concerns about inflation. It is a muddled mess and it is making it difficult to understand the overall sentiment.
The corrective action in the senior indices on Thursday helped to create more correlated action in the market, and that was helpful from a trading standpoint, but there is a very energetic bounce at hand for Friday.
Once again, rotation is the name of the game as the Nasdaq is lagging, but bonds have reversed down and that is helping banks, transports and other groups hit Thursday.
It would be healthier if the indices corrected more, but the market doesn't seem interested in what traders like me would like to see. We will have to continue to deal with this rotational action, and that means a disconnect between the indices and the action in the majority of stocks.