When the market is undergoing corrective action, stocks tend to move in tandem. The action is driven from the top down as indices are the primary trading vehicle. In addition, large reallocations by pension plans and funds as well computerized trading tends to drive large baskets of stocks.
This sort of action creates quite a bit of pricing inefficiency. When a big fund sells S&P 500 ETF (SPY) all 500 stocks are sold without regard to their individual merits. There will be many 'good' stocks sold along with those that deserve to sell off.
As the corrective action comes to an end, there is typically a surge in stock picking. Fund managers focus more on finding the stocks that have been unfairly treated during the corrective action and those stocks start acting better.
On Monday, we are seeing a good example of how the market is transitioning back to stock picking now that there is less concern about the recent correction. There is still substantial risk in the indices, but the attitude now seems to be that enough stocks have been clobbered that there are some good bargains.
Quite a few biotechnology names, for example, are on my screen. This is due in part to CES -- the Consumer Electronics Show -- a big biotechnology conference in San Francisco sponsored by JP Morgan (JPM) , but the sector has been one of the hardest hit which makes it ripe for one of the biggest bounces. Sarepta Therapeutics (SRPT) , Ra Pharmaceuticals (RARX) , Viking Therapeutics (VKTX) and Aimmune Therapeutics (AIMT) are a few that I'm holding.
There are obvious signs that folks are trying to put cash to work and are doing so selectively in individual stocks rather than through index plays. Breadth is very good at 4825 gainers to 2100 decliners, and pockets of momentum are developing -- although there are overbought conditions in many places.
The phrase 'a stock picker's market' is misused far too often by the business media, but this really is one right now.
