Last week the market suffered its worst action since the pandemic meltdown in February and March 2020. In many ways, the current environment is even more difficult to navigate than the COVID selloff. Back then, there was no question what the issue was and stocks sold off in tandem. The potential for fiscal and monetary action was always there. Once things did turn, it was smooth sailing to the upside as the Fed flooded the economy with liquidity.
The current market environment is far more chaotic and uncertain. Neither the Fed nor Congress is riding to the rescue this time as they struggle with inflation and the supply chain. What is making things even more difficult is the unevenness of the correction. As I've been discussing for months, there are parts of the market that have been struggling for nearly a year and are deep into a bear market. There are other parts, primarily the indexes and bigger-cap stocks, that only have been correcting for a few weeks. Even the most oversold stocks are unable to find a low when everyone is watching the indexes to see if they will continue to sell off.
If the indexes were as oversold and stretched to the downside as the average stock, then there would be endless predictions that a bottom was forming and a bounce was about to begin. However, we are still dealing with this two-tiered market where there is a giant disparity between the S&P 500 on the one hand, which isn't even close to a drop of 20%, and the fact that more than 50% of the stocks in the market are already in an official drop of 20%.
What is even more amazing about this market is that nearly a quarter of all stocks have been cut in half while the S&P 500 isn't even down 10% from highs.
I don't know how this mess will resolve itself, but my focus is on the stocks and sectors that are the most oversold. If we do have an oversold bounce, then I expect growth, biotechnology and small-caps to outperform just like they have outperformed to the downside.
We have a nervous start to the week as cryptos meltdown, worries grow about Ukraine and there is an increased belief that the Fed is on the verge of four or five interest rate hikes of one-quarter point.
Keep plenty of cash on hand and stay flexible. A bounce is coming, but the timing is extremely difficult. It is better to wait for strength than to deploy too much capital into weakness.