Although the S&P 500 has been up eight of the last 10 days and is hitting new all-time highs, the overall market action has been increasingly unstable over the past week. There has been a very strong rotation in, out and back in the Nasdaq 100 while value stocks and sectors such as precious metals have become more volatile.
The indices still have not done anything wrong technically, but the internal action is becoming less stable. There have been a couple of late-day selloffs recently and momentum has been slowing, but while it has been choppy there continues to be some solid support.
I've been drawing a distinction recently between a "market timing" market and a "stock picking" market. The market-timing bears have had a tremendously difficult time trying to call a market top. On the other hand, stock picking and speculative trading has been very robust. The best course of action lately has been to ignore the macroeconomic arguments and the big-picture worries and simply focus on finding good stocks.
The action on Thursday was a good example of this. While the indices did little, the stock-picking under the surface was quite good. Part of this is just the ability to find the hot pockets of action, but they do still exist and that is where the money is to be made.
At some point, I expect to see stock-picking diminish and more correlated selling to emerge. That is how a correction will develop. There are signs of more correlated selling but they are hidden by rotational action in and out of the FATMAAN names. We need to monitor that closely if we want to avoid being caught in a sharper selloff.
Ultimately, it is the stocks that you are holding that are the best timing device. When they stop performing and you are losing money, then that is a signal to do some selling. If the market regroups and starts acting better, you start looking for new buys.
I remain bullish because I'm finding good stocks to trade, but I'm growing concerned about the action in the indices and will become more defensive quite quickly if the stock-picking stops working.
My approach to the market is highly reactive. I'm not going to try to predict what will happen. I'm simply going to respond as conditions shift. Conditions are still good for stock pickers, but that can change quite quickly.
We have some early pressure as hopes for a stimulus day erode and reports of more Covid-19 cases, especially in Europe, become a concern.