All the major indices sold off on Monday, but a close examination of the action uncovers several positives. The most significant thing about the action was that it was highly rotational. There wasn't the sort of correlated, broad selling that indicates concern that a significant drop is about to occur. Market players still had a healthy appetite for buying, but they were more selective and let go of some of the laggards.
The weakest action on Monday was in the Nasdaq 100 and FATMAAN names. Facebook (FB) , Twitter (TWTR) and social media stocks were under pressure due to the recent political issues. Also, Tesla (TSLA) suffered its first losing day since Dec. 22. By any measure, TSLA was extended and in need of a rest, and it had one, but it is already bouncing back here on Tuesday morning.
The bullishness of investors was reflected in the relative strength of small-caps and some of the big-cap momentum names in the Innovator IBD 50 (FFTY) . That ETF rose nearly 1% as buyers were still comfortable with select momentum names.
Here on Tuesday morning there are some mild positive actions. The market is ignoring the headlines about President Trump and there still is no significant reaction to the growing number of Covid-19 cases and the slow rollout of the vaccine. Chancellor Angela Merkel in Germany has warned that another 10 weeks of lockdown may be needed.
The bears are still predicting that disaster lies around the corner, but the robust stock-picking, especially in small-caps, continues. Until that shifts, the smart move is to stay with the positive momentum.
The thing we need to watch for is broad selling. When stocks fall without regard to their sectors or individual merit it will be time to play aggressive defense. It is very easy to sit on the sidelines and anticipate trouble. The thing that is more difficult is to continually work on finding what is working and trade it aggressively. Many market participants are bearish because they don't want to do the more challenging work of being bullish.
My game plan is the same as it has been for many months now. Manage positions closely and keep looking for new setups to trade. It is crucial to focus on the strongest stocks in the strongest sectors.