Two weeks ago, when the S&P 500 broke out to a new all-time high, market timers were busy predicting disaster due to extended technical conditions and bubbly action in many stocks. They finally did see the correction they hoped for, but it occurred due to something totally unforeseen. The market corrected due to a massive short squeeze in a few junk names, which triggered selling of quality longs in order to cover losses.
The small traders who triggered the short squeeze have now given back $167 billion in gains from the meme stocks, and the overall market has reverted back to the same place it was two weeks ago. Speculative action in special purpose acquisition companies (SPACs), cannabis, electric vehicles and low-priced stocks have picked up, and some of that short-squeeze cash is now helping to push stocks that already have positive momentum.
Earnings Tuesday night from Amazon.com (AMZN) and Alphabet (GOOGL) were solid and there is some positive reaction, but so far the reaction to results during this earnings season has been quite poor. If Amazon and Google fizzle out like other FATMAAN names it will hurt the indices, but what has mattered most to the market recently is the small-cap stock picking. The big-caps have not been primary leadership for a while, and that's OK as long as liquidity continues to flow into other parts of the market.
The market-timing bears are going to start warning us about extended market conditions, bubbly action and dumb-money speculative trading. It is the sort of contrary indicator that the expert pundits love. The problem is that they simply can't time this market with any sort of accuracy.
When you focus too much on the indices, you miss what is really going on. Even the corrective action of the past week or so looked much different when you dug under the surface and saw that there wasn't any severe technical damage in the great bulk of stocks that have been driving the market. What corrected were some of the favorites held by hedge funds that were dumped to cover losses due to short squeezes.
The indices are indicating a minor positive open with the Nasdaq 100 leading the way due mainly to Alphabet. Speculative action in SPACs and cannabis continues. There clearly is a lot of buying power looking for the next small-cap trade.
The short-squeeze game is not totally dead, but the bounces look like the last gasp of life as the trade comes to an end. Some of the Reddit crowd is preaching defiance, but it isn't very effective when you lose all your money.
The most important thing right now is that this is a very good market for aggressive traders that focus on stock picking. That will remain my focus.