Some of the best and most experienced traders I know have recently commented that the current market environment is one of the most difficult that they have faced. Casual market observers are probably puzzled by that remark as the correction in the indexes has been relatively mild compared to prior bear markets. Most of the business media isn't even calling the current action a bear market since the S&P 500 has not dropped 20% at this point.
This disconnection between various areas of the market is the heart of what is causing so much consternation for experienced traders. Aggressive traders tend to favor stocks with greater volatility as they will produce the biggest moves, but these stocks have been pounded recently.
High P/E and high-beta names have had no support regardless of fundamentals. Small-caps, growth shares, biotechnology, SPAC-related names, and a host of other stocks are deep in bear markets and are trading near lows, but they are unable to bounce as the indexes are still under pressure and in an early stage of correction. There are still no signs of a bottom, although the pullbacks are at extreme levels.
Although this is an extremely difficult market right now, it holds the potential for some exceptional opportunities. I have never been more optimistic about the long-term fundamentals of a number of stocks that I favor. For example, in the biotechnology sector, I believe that Aurinia Pharmaceuticals (AUPH) , Myovant Sciences (MYOV) and Xeris Biopharma Holdings (XERS) are going to be stellar performers once the pressure on the sector lifts and the market starts to favor individual stock-picking again.
There are dozens of stocks that are under extreme pressure because of a combination of illiquidity and sector flows. The shift in the Fed posture is causing huge movements in capital flows that have nothing to do with the merits of individual stocks, and it is causing tremendous collateral damage.
At this point, our job is to navigate through this difficult market and be ready to move fast and aggressively when market conditions shift. It may feel a bit hopeless right now, but the one great certainty of the market is cycles, and this cycle will eventually shift.