The market kicks off the new week with mixed technical conditions and plenty of news flow on deck. It has been a tale of two markets recently with big-cap names and the senior indices hitting new highs as they become increasingly extended. Under the surface, many of the social media favorites from a couple of months ago and groups like biotechnology, gambling, SPACs, and cannabis are struggling with bear market action.
The big question for many traders is what happens to the broad market if the indices and big-caps correct. Will money rotate back into the small-caps that have been so poor lately, or will they suffer continued pressure as cash moves to the sidelines. Typically it is tough for small caps to regain strong momentum when the indices correct, but many are already washed out.
COVID issues continue to linger as the Johnson & Johnson (JNJ) vaccine is being kept on hold and new cases pick up in certain geographic areas. The economy is still opening fast, but worries about inflation and interest rates have cooled off as there are still some obstacles out there to a return to normal.
Earnings season picks up this week as nonbank stocks start to report. IBM (IBM) reports tonight, Netflix (NFLX) tomorrow night, and then a wide variety of other names start to hit before the FATMAAN names start to report next week.
The big question for earnings reports now is whether the recent runup is going to produce some 'sell the news' action. Expectations are for good reports and strong guidance, but how much of that is already priced in, and how anxious will investors be to lock in some gains after a big run?
Another question this morning is whether the speculative small-caps will heat up again. There was some intense volatility in bitcoin and other cryptos over the weekend, causing concern. Bitcoin dropped from around $60,000 to $52,148 in about 15 minutes during the Asian season as a number of rumors swirled about what was driving the action. That sort of movement is likely to scare away some speculative traders, and the issue is whether that spills over into equities or will they be seen as a safer choice.
It has been a tough market for aggressive stock pickers for weeks now as money has rotated into big-caps that are now quite extended. The best course of action right now is to monitor the action carefully and be ready to react as conditions shift. There are a lot of cross-currents out there, and it is easy to be caught on the wrong side of the rotations if you aren't careful.