Although it is not very visible in the indices so far, the market is being hit with some significant rotational action that is helping to deal with some extended stocks and frothy action. The most obvious example is Tesla (TSLA) which was flying higher this morning due in part to a gamma squeeze. When that pressure ended, there was a sharp reversal that dropped the stock from $1095 to $1001.
In addition to the sharp turn in Tesla, other high-beta high PE names like Upstart Holdings (UPST) and Affirm (AFRM) have lost their momentum. There has also been some crazy action in SPAC names, but many of them reversed. The SPAC, Digital World Acquisition (DWAC) , for example, is down more than $100 from its highs last week.
Small-caps are lagging with the Russell 2000 (IWM) down about 0.4%, and breadth is now slightly negative. When small-caps lag, bids dry up, and even the best values can sink further. Valuation just doesn't serve very well as a means of support when there are so few buyers.
The market remains in an uptrend, but stocks need to reset periodically. We have some big earnings news tonight that will shake things up further, and that should help to advance the technical conditions.
I've put some additional funds to work recently but still am carrying almost 50% cash. It has not been easy to put longer-term cash to work, even though there has been a nice jump over the past couple of weeks.
I remain optimistic about opportunities until the end of the year and see the rotational action that is hitting as just part of the normal consolidation that is needed when the action becomes too frothy.
