Since Sept. 3 the market has been undergoing a rotational correction. Various sectors of the market have been correcting at different times while other areas have shown good relative strength.
This correction started with the big-cap technology names. The FATMAAN stocks had become grossly extended in a frenzy of buying caused in part by the stock splits of Apple (AAPL) and Tesla (TSLA) . It had become a very narrow market but, as is the tendency of the market beast, this excessive action was the target of some selling.
The Nasdaq 100 ETF (QQQ) has been dropping for nearly three weeks but what has been most interesting is that much of the market ignored what was happening in these leadership names. As I've been discussing for the past month, this has been a great market for stock-pickers primarily because the selling pressure was not correlated. The money coming out of the FATMAAN names was moving into other areas of the market that were not nearly as extended.
On Monday the rotational correction shifted. Early in the day the entire market was hit hard but as things progressed, money rotated into the big-cap technology names that have been struggling for weeks. The Nasdaq 100 ETF even managed to close in positive territory, while the selling pressure in the rest of the market did not relent. The Russell 2000 ETF (IWM) , which has been a relatively safe haven, bounced a bit in the afternoon but still finished with a loss of 3.5%.
Even after the big drop in the QQQ since early September, the big-cap technology names are still more extended than much of the rest of the market. Most of the market has never even recovered the highs hit in February while the Nasdaq and FATMAAN names are still well above those levels.
Now what? The news flow is being used as a justification now to keep pressure on the market. There is concern that there is no fiscal stimulus coming soon, that Covid-19 cases are ramping up, and that political chaos will intensify, The bigger question is whether the massive liquidity created by the Fed can keep the economy running as it faces a number of obstacles.
Market players are feeling increased uncertainty and that is why we are seeing this rotational correction. We will know have to watch the price action very carefully. There is hope that the big intraday reversal in the Nasdaq Monday was bottoming action but there needs to be some follow through to prove that is the case.
My game plan is to stay focused on managing individual positions and to cut those that are breaking support and losing momentum. There are quite a few names that I like into third-quarter earnings but we have a few weeks before reports hit and they can't be allowed to slip much in the interim.
This has been an unusual market in that the rotational action has been so well defined. It is morphing now and we will have to carefully watch to see what leadership emerges. There are signs that the "stay at home" stocks are regaining momentum as worries about a second wave of Covid takes hold but there are also some signs of economic optimism that are helping many individual stocks.
This is a very tricky market right now and it is important to stay vigilant and flexible.