Concerns about the highest levels of inflation in 30 years have caused increased market volatility this week. High price-to-earnings (P/E) growth stocks were hit hard on Wednesday but managed to bounce back to some degree on Thursday. Bonds, cryptocurrencies and precious metals have seen increased volatility as well. A number of earnings reports also have caused sharp moves in individual stocks.
This movement has caused concern among the big-picture pundits, but what traditional Wall Street experts continue to miss is the very strong speculative trading. Retail traders and investors are still quite aggressive, and even a hard hit on Wednesday is not slowing them down. The list of stocks moving more than 10% is very long, and there is strong interest in themes such as electric vehicles, cannabis, batteries and various special purpose acquisition companies (SPACs).
It is very easy for the folks in the business media to miss what is really going on in the market. For many months this year, they blathered endlessly about the major indices hitting new highs on an almost daily basis. They barely mentioned the fact that the vast majority of small-caps and secondary names were in a bear market.
Now the tables have turned, and the same big-picture experts continue to talk about how the indices are dancing around to inflation and other macro concerns while they completely miss the positive action in many stocks that was triggered when the Russell 2000 broke out to a new high a couple weeks ago.
The key to navigating this market is to stay focused on individual stocks and to identify strong themes and sectors. The most obvious example this week is the initial public offering (IPO) of electric vehicle maker Rivian Automotive (RIVN) , which triggered sympathetic action in other EV names such as Lucid Group (LCID) and Nio Inc. (NIO) .
Another theme I've discussed this week is cannabis. There has been a surge in many names in anticipation that the Republicans will introduce a bill next week that finally may lead to SAFE banking and full listing of the MSO (multi-state operator) names that are currently languishing on the OTC market.
As long as we continue to see this strong speculative trading in individual stocks, then I am not too worried about the volatility in the indices. It is when there is broad, correlated selling without any regard to fundamentals that would be a real warning sign.
We have a slightly positive open on the way here on Friday as we wrap up the week.
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