The market bounce that occurred on Wednesday fizzled out on Thursday, but underlying support was not breached.
The main excuse for the reversal was that it was very unlikely that a new stimulus bill would pass the Senate before the presidential election. This isn't a big surprise, although it was a good excuse for some trapped bulls to sell into the strength and escape some positions that had recently dropped.
So far Friday morning there is no downside follow-through. The indices are indicating a positive open and the mood feels complacent. All eyes will be on the recent lows, which is 3329 for the S&P 500 and 10,837 for the Nasdaq. If those areas are breached it should trigger some sell stops but there is a likelihood that there is a good supply of dip buyers that will be looking to buy that technical breach.
While the technical patterns of the indices are precarious, I continue to see very healthy stock-picking action. There has been a dramatic difference in the intensity of selling in the big-cap technology names and many of the secondary stocks. Valuations are substantially different and there continues to be some very good speculative action. I continue to focus on the SPAC group , which has been outstanding recently and is a good illustration of the continued appetite for stock-picking.
Ultimately it is the action in individual stocks rather than the indices that matter most to me as I don't spend too much time trying to predict overall market direction. My focus is on opportunities in individual stocks and not some theoretical discussion about what the indices might do days, weeks, or months from now.
While the indices are a warning sign, the price action has no shifted sufficiently for me to dump stocks and raise cash. If stocks start breaking down I will take some hits, sell them, and become more defensive.
It is an unusual market environment. The disconnect between the big cap FATMAAN names and other elements of the market is as severe as I can recall. Charts of stocks such as Apple (AAPL) look quite poor but I see dozens of good charts in secondary stocks.
It is important to stay vigilant and to manage positions tightly but the big picture created by the indices is misleading.