Since the market bottomed out in March 2020, there have been two main market themes. The first is very severe spinning action, and the second is very sharp bounces after a correlated sell.
We have a good example of the second theme on Tuesday. Stocks opened slightly higher, then gradually gained momentum throughout the day. The only index that did not fully recoup all of its losses, at least temporarily, before a few late sales, was the Dow Jones. The Russell 2000 Fund (IWM) led the way with a substantial gain of around 3%, which was reflected in more than six to a positive breadth.
Sudden rebounds after a sell-off aren’t unusual, but what’s unusual is that there are full recoveries without any retesting. Bounces happen so quickly that it’s extremely difficult to reposition yourself if you try market timing. Any anticipatory bear that caught Monday’s drop didn’t have much time to lock in the gains.
And now? Was this surge in increased volatility enough to ease some of the market excesses? The good news is that the big disconnect between senior indices and the majority of stocks has been disrupted. We no longer see indices hitting new all-time highs on negative width.
Another positive point is that this action has refocused attention on stock picking. Many of the best bounces are in stocks that have been unfairly sold as part of the vicious spinning action. It doesn’t hurt that profits are rising quickly and that we focus more on fundamentals.
The bears will point out that the problem of COVID variants has not gone away, and concerns are growing now. Bonds have reversed lower on an intraday basis, which is a good sign for economic growth, but how quickly will these inflationary fears resurface?
Hopefully, we can focus more on stock picking after these big swings, and there are definitely some interesting stocks to consider.
Have a good evening. I will see you tomorrow.
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