The market action has undergone a shift in character over the last couple of days but it remains quite healthy as we move into earnings season.
The primary shift that has occurred is a rotation out of smaller cap stocks that have provided exceptional stock picking for several months and a move back into the larger cap, technology stocks, and the FATMAAN names in particular. On Tuesday the Nasdaq 100 (QQQ) held steady while the Russell 2000 ETF (IWM) pulled back as breadth was around 2 to 1 negative.
What is most notable about the recent market action is that it continues to be immune from the headline news. Neither the inability of Congress to make a fiscal stimulus deal nor the growth in Covid cases is having any major impact. Even issues with Covid drug trials at Johnson & Johnson (JNJ) and Lilly (LLY) are being taken in stride.
Technically the charts of all the indices are somewhat extended and in need of a rest but, so far, there are no signs of correlated selling. Consolidation and correction are taking place via rotational action as the traditional growth stock leaders are stepping up. What we need to watch for is more correlated selling. If breadth deteriorates further that will be a concern.
The key to navigating this market over the past few months has been to focus on stock picking and respect the price action. The easiest way to find trouble is to anticipate market downside or to try to forecast the impact of news headlines.
What is most bullish about this market is that individual stocks appear to be moving primarily based on a better economy and stronger growth. They are ignoring the pessimistic headlines and the dip buyers continue to step up on even minor weaknesses.
The indices and many stocks are extended and need some rest. That can occur in a variety of ways and doesn't necessarily suggest that we will see a sharp drop.
My game plan continues to be largely the same. I will focus on key individual stocks, manage positions carefully and look for new candidates to buy that have good charts and strong prospects.
We have a minor positive start as we look ahead to a few more earnings reports in the banking sector.