In the early going Tuesday, bond yields are hitting their highest point in two years, which is causing more rotational action out of big-cap technology and growth names. The Nasdaq 100 (QQQ) is indicated down around 1.7% a few hours before the market open.
The market surprised some traders with positive action into the close on Friday, but the gloom and doom have returned Tuesday morning as it becomes clear that the market is still trying to discount what a hawkish Fed is going to mean.
A hawkish Fed is a theme that the market has not dealt with for any sustained period since before the 2008-2009 Great Recession and bear market. Market players have grown used to the Fed reversing course back to dovish after a bit of a taper tantrum, but this time the theme is sustained and will take some time before it can be fully discounted.
What is making things worse is that the Omicron variant is disrupting the economy, keeping the labor market tight, and hurting supply chains. These forces are creating more inflationary pressures, and the Fed is well behind the curve. There are now pundits that believe that the Fed should go to a half-point increase in March to create some shock and awe.
The second theme that is plaguing the market is related in some degree to the first. I've been writing about how the indexes fail to reflect what is really going on with the majority of stocks for months. Now that we have rotational action between growth and value picking up even more steam, the disparities are even greater.
The Wall Street Journal Tuesday quotes Jason Goepfert of Sundial Capital Research, who points out that around 39% of the stocks in the Nasdaq Index are down at least 50% from their highs while the Nasdaq itself is down only 7%. At no other point since the dot-com bubble in 1999 have that many stocks fallen that far while the index is that close to highs.
That encapsulates the issue I've been discussing since February, but we still are struggling with the resolution to this disparity. How does the Nasdaq Index catch up with all the individual stocks that are down 50% without doing even more damage?
There is no easy answer to that question. To navigate this market, we will have to stay focused on action in various sectors. Can biotechnology find a bottom? Will the rotation out of stocks held by Ark Innovation ETF (ARKK) continue? Will the FATMAAN names stay under pressure? Can energy and financials outperform?
The one clear thing about this market is that volatility is likely to remain high.
