A much-anticipated market pullback finally started to build some momentum this week. The action was quite frothy on Tuesday afternoon with speculative traders looking to create short squeezes and overall market breadth very strong, but when the S&P 500 hit its 200-day simple moving average, a wave of selling hit, and the indexes closed well off their lows.
The selling picked up a little on Wednesday, but meme traders stayed extremely aggressive with names like Bed Bath & Beyond (BBBY) , Torrid Holdings Inc. (CURV) , AMC Entertainment Holdings (AMC) , Blue Apron Holdings Inc. (APRN) , GameStop (GME) , and others. Some of these stocks were going parabolic, but news that the CEO of GME had dumped his very large position in BBBY caught speculative traders by surprise and sent these names sharply lower.
The blow of cultish "meme" stocks spilled over into the crypto-sector on Thursday night, and suddenly the bulls that were worried about being underinvested and missing out were looking to lighten up their market exposure.
There was very broad selling on Friday, with breadth running around six to one negative. New lows expanded to around $140, and hot groups like growth and biotechnology were hit the hardest. Small caps, which led for much of the recent rally, gave back about 3% this week.
The big question now is whether this is just some routine profit-taking after a very strong run, or is it the start of something much more severe? There still are many market participants that believe this was just a very energetic bull market bounce, but there are plenty of bulls that believe that this move was far too powerful to just be a countertrend move.
The bad news is that this corrective action is occurring as we head into the weakest time of the year seasonally. Volume was quite light this week and will stay light next week. Much of the recent rally was driven by positioning and factors other than improved fundamentals or economic conditions. Some of the positioning issues have now dissipated and won't supply the same level of upside pressure in the weeks ahead.
At this point, the risk of deeper corrective action is quite high. However, this very strong rally left many stocks extended and with poor entry points, so that isn't a bad thing if you have some cash to work with.
Have a great weekend. I'll see you on Monday.
