A mixed session turned ugly on Wednesday afternoon following the release of the minutes of the Federal Reserve's last meeting, which indicated some movement toward tapering in the next six months. There have already been some hints that the Fed was ready to start unwinding its buying of Treasuries and mortgage-backed securities, but the news was a good excuse to accelerate the corrective action, which has been gaining traction recently.
What was most notable about the action on Wednesday was that the worst sectors of the market, which include small-caps and growth stocks, showed some relative strength early in the day and did not fall as much as the indices into the close. It was a slight reversion of the rotational action that has been taking place for quite a while, but the gulf between the indices and the broad market is still very wide.
Traders have been struggling with the market action for a while as the indices trended up on negative breadth and many small-cap and growth names wallowed in bear markets.
One of the easiest ways to see the disparity in the market is to compare the ARK Innovation ETF (ARKK) , which holds mostly high P/E, high-growth names, to the S&P 500. ARKK is down about 28% from its February highs, while the S&P 500 is down about 2% from the highs it hit on Monday. There are similar disparities in other parts of the market. To a large extent, there has been a stealth bear market that has impacted the stocks favored by many smaller investors.
This isn't a new development. It has been ongoing for months now, but the question that we need to address is how it will eventually be reconciled. The most logical way would be for the indices to catch up some to the downside. If the indices underperformed some of the lagging sectors for a while then it would help to realign the market and help to produce the sort of negative sentiment needed for an effective correction.
Of course, the market seldom makes things that simple or easy, but a deeper correction in the indices is what this market needs to help end the misery of the poor trading that has lasted for months.
We have a poor open on the way Thursday as the late selling on Wednesday, and the poor close generates some downside momentum, but this market has a tendency to bounce back from poor opens and doesn't allow negative sentiment to build to an effective level. Many small-cap traders have already capitulated and are totally disgusted with this market, but we need some of that same emotion in the broader market.
