The selling was steady on Wednesday, with breadth running 3-to-1 negative and the Nasdaq 100 fund (QQQ) and the small caps Russell 2000 exchange-traded fund (IWM) leading to the downside with losses of more than 1.5%. There wasn't any new or surprising news to trigger the action. Investors mostly reassessed what Fed Chair Jerome Powell has been saying recently and decided that maybe it was time to take some profits.
Much of the recent strength has been driven by short-covering, short-term options, and underinvestment. It appears that some of those dynamics may have run the course and are starting to reverse.
Technically the indexes are still in good shape and have some nearby support that has not yet been tested, but the worst action today was in many of the smaller stocks that have been outperforming. The pockets of momentum have slowed, but there still is some aggressive action in the AI group. Traders are still pursuing those names, simply because there isn't much else for them to chase.
The market has been frothy at times lately and is due for some corrective action, but the question is, how deep will things pull back before support occurs? There has been some denial about the level of Fed hawkishness, and the action now reflects a more realistic view of the economic situation.
Have a good evening. I'll see you tomorrow.