Since the market low on March 23, calls for a market pullback have become increasingly shrill. The uptrend has been led by big-cap technology stocks, FAANG names, and Tesla (TSLA) . In addition, there has been very aggressive speculative trading in various areas of the market, such as electric vehicles, special purpose acquisition companies (SPACs) and cannabis.
On Monday, the frenzy was reaching a fever pitch as analysts increased their target prices on several FAANG stocks and Tesla exploded higher as small, speculative traders piled in and chased it upward.
Then, late in the day, the momentum reversed sharply, trapping some bulls and producing sizable losses primarily in the stocks that have had the biggest recent gains. Breadth wasn't bad overall and the indices suffered fairly mild losses, but the leading stocks reversed hard and caused some pain for bulls who have grown increasingly complacent about a market that has had tremendously strong support.
An intraday reversal such as the one that occurred on Monday is a warning sign that requires some attention. It is possible that it may be just another one-and-done reversal like we have seen several times in recent weeks, but the potential for some downside follow-through is much higher now and that means we will need to play tougher defense.
There are a number of fundamental and technical reasons supporting the view that the market is ready for some corrective action. However, there is no reason to anticipate a total collapse. Indeed, the high level of speculative action recently suggests that there will be very good support as traders attempt to enter the stocks they have missed out in the recent rally.
This corrective action is just starting as we enter earnings season. Some of the big banks are reporting here on Tuesday morning and we aren't seeing any big reactions so far, but banks are a laggard and are not making much of a market impact at this time.
The thing that will be key is the reaction to the FAANG stocks and other technology names that have been leaders. The stocks are set up for a "sell the news" reaction and the great likelihood is that management is going to be cautious with guidance as Covid-19 continues to present great uncertainty.
The bears gained an advantage on Monday with the intraday reversal, but can they now create some sustained pressure? There is a decent bounce this morning and Tesla received a huge price target from an analyst, which is driving it back up. We'll see how much interest there is in fishing some pullbacks, but if Monday's lows are breached watch for selling pressure to accelerate.
There are plenty of good reasons why this market should see a deeper correction, but the bulls are not going to give up without a fight.