The rotational action into secondary stocks continues on Wednesday morning, but an intraday reversal is hitting fairly hard, and most everything is off their morning highs. Breadth is still positive at around 4,700 gainers to 3,200 decliners, but much of the Russell 2000 strength is due to regional banks -- as seen in the regional bank exchange-traded fund (CRE) -- and energy. Other key groups like biotechnology and artificial intelligence are in the red.
There has been quite a bit of celebration about the market strength recently, and the relative strength in small caps was a missing ingredient that shifted the view of some skeptics. But declaring that this is the start of a new bull market isn't a helpful approach. The risk that we will see another down leg is quite high, especially as we confront more economic issues.
Stanley Druckenmiller, who is considered by some to be one of the best traders in history, stated that he sees corporate profits down 20% to 30% and believes that sticky inflation increases the risk of a hard economic landing. Druckenmiller racked up some big recent gains on an investment in Nvidia (NVDA) , so this isn't someone that is just talking his book.
For now, we have positive technical action, better action in small caps, a hot theme in AI, and quite a bit of liquidity to keep things running. The bulls deserve the benefit of the doubt now that the market is finally starting to broaden out a bit. However, it is extremely important to manage positions closely and to watch for a shift in the character of this action. The intraday reversal that hit is a good example of toppy action.
I have been a net seller so far today and raised quite a bit of cash. That isn't because I'm bearish but because I'm being strategic and will be looking to buy pullbacks rather than chase strength.
It is a great relief to see some better trading recently, but that doesn't justify the declaration of a new bull market. Ignore the market characterizations and stay focused on the price action.
