For a little less than a month now, the market has been undergoing some routine corrective action. It started with a steady grind lower than lasted a couple of weeks. That led to a sharp drop on the Evergrande debt crisis and then a V-shaped bounce over the next several days. Monday the correction transitioned into rotational action with technology stocks struggling while oil and small-caps outperformed to the upside.
Tuesday morning the market is seeing pressure again as oil and energy continue to move higher. Interest rates have also been moving up steadily, and the 20+ Year Treasury Bond ETF (TLT) is dropping under its 200-day simple moving average. Cryptocurrencies are also under pressure again, and all of the FATMAAN names are indicated lower for the second day in a row.
What we have here is a continuation of the correction that has been playing out for a while. The V-shaped bounce sucked in some hopeful bulls, but the rotational action trapped folks that were looking for the FATMAAN leadership to re-exert itself. What is most notable about the action is that there has been fairly good stock picking under the surface for retail traders. Small-caps have been seeing strong inflows, and the gap that developed for months between the senior indexes and many of the secondary stocks has been closing.
As I've noted numerous times in recent months, the great bulk of the market has already gone through a fairly deep correction. More than half of all stocks are still trading under their 50-day simple moving average, while the S&P 500 and Nasdaq 100 (QQQ) would still have to drop substantially to even touch those levels.
The market still has a few more weeks to deal with negative seasonality before earnings season starts, and it is still facing a very large divergence between big-caps and small-caps. It is a messy situation right now, and higher energy prices and interest rates are not helping the bullish cause.
The best course of action here is to play it tight and not let losses build too much while waiting for the market to sort itself out. There are decent pockets of trading action like those that I pointed out in SPACs Monday but stay selective, keep cash positions high, and stay patient.