The indices pulled back from recent highs Wednesday afternoon, but the selling looked like program-driven repositioning in bigger-cap names rather than a shift in market character. Under the surface, there continued to be good speculative trading as dozens of stocks gained more than 10% during the day and trading sentiment remained quite positive.
There are two major themes at work right now. The first is that macro considerations are not having any impact as the indices become increasingly extended. The surge in the Delta variant and ongoing supply chain problems are negatives, but they have had a positive impact on the market as they have prevented inflation from building faster and have created some hope for many that the Fed will remain accommodative longer than anticipated.
The big picture pundits keep trying to predict a top in the indices but have been frustrated by the market's refusal to listen to their arguments. Ironically, the pessimism is helping to hold stocks aloft as it creates a Wall of Worry dynamic. Market players aren't chasing the indices, but they keep putting capital to work out of fear they will be left behind.
The other dynamic at work is that small-caps, growth names, and speculative stocks have been trading well from what I called the "Snake Bite Bottom" on August 19. Since that time, stock-pickers have come roaring back, and there has been a steady supply of good trading in secondary stocks. Many of these stocks were in a bear market that started after the peak in February, but the character of the trading has undergone a nice transformation in recent weeks.
We are now entering the slowest period of the year, and it makes sense that there is some consolidation or corrective action as we set up for third-quarter earnings and the positive seasonality that will occur by the end of the year. So far, there haven't been any signs that this market is ready to rest, and even if it does, it is important to keep in mind the two-tiered nature of the trading. The indices have not at all reflected what is really going on out there.
My primary focus is always the positive trading action in individual stocks. I don't see any major shift occurring there right now, so I will continue to look for shorter-term momentum opportunities. What we have to watch for is the sort of top we had back in February, but the current action is not nearly as frothy or as positive. It is much more narrow and selective, although there is a focus on "junk" names and short-squeezes.
The bottom line is that it continues to be a good trading environment regardless of big-picture concerns, so I'm going to trade it.