The market has been undergoing corrective action for about two weeks now. It has several sharp downward moves and a couple of good bounces during the period. Tuesday was a mixed day, with some profit-taking occurring after the best day of the year on Monday.
Stocks are rebounding again this morning, but this is not a clear uptrend at this point. Things are moving in the right direction, but more work is needed. The primary catalyst for the recent pullback was a spike in bond yields and increased concerns about inflationary pressures as the economy's reopening gains momentum.
Market corrections are often driven by concerns that the economy is slowing, but we have the opposite situation now as there is a high likelihood that the majority of the population will have the Covid vaccine by this summer, as well as some additional stimulus money. There will be some rapid growth, but for the first time since before the 2008-2009 bear market, inflation may be an issue, and the market is currently struggling with how to discount that problem.
Before this recent corrective action, traders were enjoying some of the best stock picking in many years. Sector themes were working, and small-caps were outperforming. That has shifted during this corrective phase, but we need to watch how the next uptrend develops. Will there be a return to big-cap technology and FATMAAN names? Will some hot SPAC action develop again? What about sectors like electric vehicles, solar energy, and cannabis? Will bitcoin (GBTC) continue to run wild?
We don't have a clear trend right now, and many of the best themes are in disarray. We are in a wait-and-see phase right now as conditions for the next market trend start to develop. This corrective phase may go deeper, but we see some good support. The momentum is choppy, and it was a bit surprising that there wasn't better follow-through on Tuesday, but the tone of the action is better this morning.
My game plan is to continue to manage existing positions carefully and to keep looking for some new buys and themes. My cash levels are relatively high, and I feel I have plenty of flexibility to adjust as conditions develop.