Although we never hear any mention of this in the business media, the current correction in the market started way back in February 2021. That is when groups like SPACs, biotechnology, meme stocks, cannabis, and other high speculation areas topped and started to roll over.
Market pundits and the financial media were largely oblivious to what was going on under the surface because a small number of big-cap technology names like Amazon (AMZN[1]) , Apple (AAPL[2]) , Microsoft (MSFT[3]) and others kept driving the indexes higher.
In November 2021, the weakness under the surface started to spread more aggressively into growth stocks and high PE technology names. That is when things like ARK Innovation ETF (ARKK[4]) really started to lose momentum. At around that same time, the FATMAAN stocks topped out and started to downtrend.
Finally, the senior indexes started to take some hard hits in early January, and the corrective process picked up steam when the March 2022 rally failed.
The important point here is that this has been a very uneven correction. By comparison, in 2020, virtually everything fell in tandem when the pandemic hit. There was a similarly high level of correlation for most of the 2008-9 bear market.
This is important because the likelihood is that the recovery from this action is likely to be very uneven as well. We are actually starting to see some of that recently as there is better relative strength in many of the worst sectors like growth, biotechnology, and even some deSPACs, while other groups like retail and the broad indexes are lagging.
The relative strength in the worst stocks is good news for stock pickers, but it is still quite early, and there is still very broad selling on macro news about inflation, the Ukraine war, supply chains, and commodity prices.
Much of the market has been in a bear market for over a year, while other parts of it – like the S&P 500 – haven’t even reached a technical bear market. That means we need to stay focused on rotational action and look for opportunities in some of the sectors and groups that have been out of favor for a very long time.
I’m not doing any buying today, but I view the reversal of yesterday’s gains as a technical positive when considered in conjunction with the rotational action that is taking place. Stay selective with buying, but there are some better charts developing in secondary stocks.
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