A primary market theme so far in 2020 is that the major indices do a poor job of reflecting what is really going on in the market. The main job of the indices is to summarize overall market health, but lately, they tend to mislead rather than illuminate.
The action on Monday was a good example. Based on the DJIA and S&P 500, it looked like a very quiet day with little action. Both indices were close to flat, and the action looked unremarkable. However, if you dug a little deeper, you would find some exceptional strong action in small-caps. The Russell 2000 ETF (IWM) jumped 1.3%, and there were dozens of stocks up more than 10%.
The small-cap strength was due in part to the announcement of the reconstitution of the Russell indices. This occurs every year at the end of June and has a significant impact on hundreds of small-caps that the index funds must buy and sell. The strength in these stocks tends to attract additional buyers that are looking for relative strength and momentum and pushes them even higher.
This strength in select small-caps should continue to be a theme for the next few weeks, but it is going to shift around quickly, as in many cases, it has nothing to do with the fundamental merits of the stocks. On the other hand, it will help to create some better price action and will help some deserving stocks to be discovered.
Bitcoin is dropping sharply, and other cryptocurrencies are also weak. It looks like the action is a result of the FBI's ability to access the "private key" of the hackers that held the Colonial Pipeline for ransom. One of the major appeals of Bitcoin for many owners is that it supposedly is private and secure and out of the reach of government investigators. That now looks like a less certain conclusion.
We have mixed action in the early going Tuesday morning as the senior indices are mostly lower. Small-caps are also weaker, but traders are likely to be hunting for some dip buyers after the strong action Monday.
My game plan is to stay focused on stock-picking. Overall, market conditions are very mixed, but there are some safe havens in individual names, and that is what I will be working on.