The major indices finished mixed on Wednesday following Congressional testimony by Fed Chair Jerome Powell. It looked like a benign session with big-cap technology leading the Nasdaq 100 (QQQ) higher, but under the surface, there was a world of pain as small-caps and mid-caps were hit hard, and speculative sectors sich as biotechnology and gambling fell into the abyss.
The story of this market lately has been the poor breadth, narrow FATMAAN leadership, and the failure of the business media to address how poorly a majority of the market has been acting. Market pundits have been growing louder about the severe rotational action that is taking place, but the primary focus has been on how the indices keep hitting new highs. The extent of the weakness in secondary stocks is not receiving much press attention.
During a typical market correction stocks move in tandem, and that drives market sentiment. The mood becomes increasingly negative, cash holdings build, and that eventually reaches a point where stocks are sold out, and a bottom starts to form.
The current market action simply is not working this way. If the S&P 500 was acting the same way as many stocks and had trended down below its 200-day simple moving average, like about 42% of all stocks, then the headlines would be filled with stories about a bear market and the awful action. This would help to produce effective bottoming action and help support levels to form.
Instead, we have this dynamic where the main focus is that the stock market is roaring higher and that market players are enjoying a robust bull market. It is an incorrect characterization, but for much of the business media, the action in the indices is the only thing that matters.
That leaves us with the difficult question of how this gross disconnect is eventually reconciled. This action is unsustainable. The gulf between a few big caps and everything else can only expand so far before there is a reaction that closes the gap. Do big-cap stocks finally start to correct? Do small stocks start to outperform? Or will there be some combination of the two?
It is likely that the gap closes in a chaotic way that makes it difficult to catch a trend, but rather than try to predict the best course of action is to stay patient and watch for a shift in the price action. There have been several intraday reverses in big caps lately that are a warning sign, but it is likely that it will take the catalyst of earnings reports to create a meaningful shift.
In the early going Thursday, all the FATMAAN names are indicated higher while the indices and small-caps are indicated lower.