Traders were worried about a new strain of Covid on Monday morning, but stocks bounced back strongly during the day as positive price action created concern about missing out on more upside.
The indices were mixed and breadth was almost 2-to-1 negative, but it was an exceptional day for astute stock pickers. There was a very long list of stocks that were up more than 10% but most of them were not the well-known big-caps that are the main focus of the media. The big-cap technology names were mixed and the FATMAAN stocks were lackluster.
For quite a while, traders have been celebrating pockets of very hot trading. Special purpose acquisition companies (SPACs) and bitcoin-related names have been the key momentum sectors, but other groups such as solar energy, biotechnology and electric vehicles have also offered exception action. It is these hot sectors that have offered huge rewards for aggressive investors.
While the indices have done well, they are not where the opportunity in this market has been. There is some positive correlation between the indices and momentum, but it is limited. Monday's action was a particularly good illustration that this is a market of stocks and not just a monolithic stock market.
The trillion-dollar question is, "How much longer does this continue?" Many market players are becoming nervous at this overabundance of opportunity. Comparisons to the Internet bubble of 1999-2000 are very common and the phrase "this will end badly" is constantly repeated.
Of course, the usual market timers are battling the momentum and telling us how idiotic the buyers are to ignore their carefully crafted negative narratives. The only problem is that the price action and hot sectors just aren't paying any attention to the arguments.
Traders are left with two basic choices: Either embrace the skepticism and move to the sidelines right away or keep pushing and try to rack up as many gains as they can, while they can. It should be quite clear that I prefer the latter approach. I'm going to stick with my strong stocks until they weaken. I expect to lose some money in a turn, but after days such as Monday I will have a pretty good cushion.
This is a tale of two markets right now. The indices look and act quite differently than the stocks in the strong momentum sectors. It is important to decide which market you are trading because the approaches are completely different.