It is a feast-or-famine trading market right now as a few big-cap names continue to drive the Dow Jones Industrial Average (DJIA) to new all-time highs while high-growth technology names are pounded into the ground. The divergence between various aspects of the market is at extreme levels, but the important issue that we must grapple with is how this inconsistency will resolve itself.
Many growth stocks, biotechnology names and speculative favorites are down 30% or more and already are deep into a bear market. The business media have mostly been ignoring what is really going on in the market as they are beholden to the senior indices. Smaller and secondary stocks really don't count for the mainstream media.
This past week there has been some weakening in the Nasdaq, which did prompt more caution. The DJIA bullishness cooled off slightly, but many market players now view it as the safe place to park some capital as the high-growth names are pounded.
Probably the best illustration of how hard some of the market has been hit is to look at Cathie Wood's ARK Innovation ETF (ARKK) . It peaked at almost $160 on Feb. 16 and closed at $111.45 on Wednesday, which is a drop of 30% in less than three months. That is classic bear market action, but it is only occurring in a few areas of the market and is offset in the indices by low-growth value names, so it is largely ignored.
How does this divergence in the market resolve itself? Does the gap between ARK and the DJIA just continue to build? Or does the gap close as ARK outperforms or the DJIA underperforms?
No one knows the answer to those questions. We simply need to monitor the action and see what sort of themes develop. It is extremely frustrating for many traders who have seen the best trading names hit hard without regard to their valuations or prospects. The individual merits of many stocks are ignored and seem to be bottomless pits while the stodgy leadership in the DJIA keeps working higher.
There is no simple solution to navigating this mess of a market. It takes patience, caution and a very selective approach. Protecting capital in order to be well-positioned for the future is key.
I'll be trying to pick off some good trades, but this is not a market that can be trusted very far at this point.