In the early stages of a bear market, stock movement tends to be very correlated. Stocks move together and their individual merits don't matter much at all. As a bear market develops, individual stock picking slowly begins to develop. Usually, there is a focus on buying "value" that has been created by the sharp drop in prices. Growth stocks are ignored as investors look for bargains.
Unsurprising, this market has been quite different than the typical bear market evolution. This is unlike any market and economic event that we have ever seen, so it shouldn't be a big surprise that it develops unlike any past bear markets.
The big difference this time is that this is a bear market combined with a major economic shift. As we deal with a sharp drop in economic growth there is also a transition to a post-pandemic economy. In this new economy, there will be a slew of new winners primarily in technology and biotechnology. Any stock with innovative ways to profit from the long-lasting repercussions of social distancing, working at home, and less travel, are going to emerge as leaders in the new economy.
Many market players have been greatly confused by this price action. How can the Nasdaq actually be positive for the year when we are dealing with the worst health and economic event we have ever seen?
The answer is that most stocks are not up. The DJIA is down about 15% for the year and the Russell 2000 Small Cap Index (IWM) is down around 21%. Approximately 83% of all stocks are below their 200-day simple moving average.
What has been deceiving about the market is that the best-performing stocks have been bigger-cap names like Amazon (AMZN) , Apple (AAPL) , and Microsoft (MSFT) . These stocks have held up because they are likely to continue to be leaders in the post-pandemic economy.
In order to deal with this two-tiered market, we have to be extremely focused on sectors rather than the indices. There is a very significant difference between a group like biotechnology (IBB) which hit new all-time highs yesterday and a group like banks and financials (XLF) , which is still struggling to find support. Value plays are badly lagging the growth plays that will dominate in the new economy.
At some point, there is likely to be another pullback in the major indices and we will see more correlated action again, but when that does happen, it is very likely that traders will not wait too long before buying the winners of the new world. This post-pandemic economy theme is not going to suddenly disappear.
We have a mild positive open on the way as market players contemplate how much longer growth stocks can drive the indices higher. This is a stock pickers market and the key is to find sectors and themes that are perceived to be beneficiaries of the COVID-19 crisis.