One of the big questions that market participants have been pondering for months is how will the wide gulf between a few big-caps that have been driving the indexes and many small-caps and growth stocks start to close? Can the stocks that have already been pounded show some relative strength when mega-cap names finally correct?
We are starting to see a deeper correction in the FATMAAN names now, but it is being hidden to some extent by the rotation into financials, value, energy, and a few other sectors. The indices still are quite elevated, but the most extended stocks are finally starting to correct, and that is healthy.
My thesis has been that that small-caps and the stocks that were the worst performers would exhibit some mild relative strength when the corrective action hits the bigger cap names. I expected it to be quite messy, but I wasn't looking for a rotation of the magnitude we are seeing.
The market is undergoing a shift in character, and bearishness is surging because it is now hitting names that were the leaders for so long. The computer algorithms are not very precise at times, and that helps to create even more pressure on some of the names that are hovering at 12-month lows.
The market needed the FATMAAN names to cool off, and they are also repricing high P/E growth stocks due to higher rates. It is a messy and challenging process, but it is just the natural cycle of the market playing out.
What I'm looking for now is whether charts can find support. Can all these names that have been out of favor for so long start to stabilize while the rotational action takes place and the FATMAAN and high P/E growth, correct? I think the answer is yes, but it is going to be a slow process, and it will be important to manage positions tightly.
I do see some signs of relative strength in the worst names, but it is narrow and fragile. We need to stay patient and continue to watch how charts develop. There is no big rush to put cash to work.