One of the major themes of the market this year has been strength in the indexes and a few big-caps, while growth stocks and secondary names act poorly. We have a reprise of that action so far today. Breadth is running about even, but many stocks reversed from early strength, and many of the small-caps on my screens do not have bids.
It is likely that this action is due in part to tax-loss selling, which has been particularly severe this year. The huge disparity in performance between a small group of big-caps and everything else has created a situation where the best performing names are being held up into the new year while there is a tendency to harvest tax losses for anyone that has recognized gains during the current year.
The good news is that this should help to create a real January Effect when that tax-loss selling is over once and for all, but it sure makes for some miserable-looking action on a day like this. There is no buying interest at all to provide some support.
Many market players are wondering if this two-tiered action can reverse. It seems illogical that big funds will suddenly give up on large liquid names and buy illiquid smaller stocks even though they may be much better values.
I have no idea how this will eventually resolve itself, but the one great certainty in the market are cycles. Bull cycles are always followed by bear cycles, and the stocks that look like they can't possibly go down eventually turn into losers. Change will take place, and that is where all the great opportunities will be found.
