The primary headline this morning is that the stock market indices are under pressure due to concerns about a rising number of COVID cases. Governments in various parts of the world are taking steps to lockdown the economy in various places, but there are a number of other issues that are driving the negative action.
OPEC+ reached an agreement on increasing oil supply, and oil stocks are lower on the news. The production increase is minimal, and it is likely that the pressure has more to do with worries about slowing demand due to the increase in COVID cases rather than a slight increase in supply.
Bond yields are lower as growth concerns temper the recent worries about inflation. Bonds (TLT) have been in an uptrend since mid-May and never really embraced the inflation narrative as equities did. Also, there is some reassessment of how quickly central banks may start to tighten. There is already a reversal by the Reserve Bank of Australia as to the timing of its tapering program.
The main thing that is driving the poor market action this morning is that the indices are finally catching up with the poor action in the broader market. For weeks the indices have been trending higher and hitting new highs on the backs of a few big-cap names. Under the surface, the majority of stocks have already been struggling, and many are deep into corrective action.
While the S&P 500 is about 10% extended over its 200-day simple moving average, 36% of stocks are below their 200-day, and 64% are below their 50-day simple moving average. If the indices had been acting like the majority of individual stocks, then they would already be well into a corrective phase.
The big issue for traders now is to what degree will the stocks that have already been hit hard in recent weeks suffer further as the senior indices finally start to correct? Can growth names and small-caps that have been in a downtrend find support? Will there be a rotation out of extended big-caps and into secondary names that are better values?
The good news is that the market has needed more correlated selling like that which is hitting this morning, in order to form a good low. The recent action with the indices hitting new highs while the majority of stocks struggled was not sustainable, but the poor action this morning will help to advance the corrective action and allow for better stock picking at some point.
Don't forget that earnings season is picking up steam. IBM (IBM) reports tonight and Netflix (NFLX) tomorrow, but most of the big names aren't until next week. Earnings will put more focus on stock picking, but we will have to watch for a theme to emerge. Is management optimistic? Are supply shortages a problem? Are estimates going up?
The corrective process is picking up steam this morning, and that is what we need for trading to eventually improve.