Don’t Be Fooled. There’s Ugliness Hiding Under the Surface.
Over the past two years a consistent theme in my market commentary has been how the major indexes fail to reflect what is really going on in the market. For a long time, strength in a few mega-cap AI-related names covered up broader weakness in the rest of the market. Everyone was excited about a roaring bull market, but the reality was that only a small handful of stocks were really moving.
That Mag 7-driven distortion finally relented in the past two months but it was replaced with vigorous rotational action that held the indexes steady while there were extreme shifts in various sectors such as oil and gas, precious metals, semiconductors, data centers, biotechnology, and retail.
The market action on Thursday was a textbook illustration of how the indexes fail to reflect what is really going on. The S&P 500 dropped 0.6% and the DJIA and the Russell 2000 were very close to even. The Nasdaq and Nasdaq 100 ($QQQ) had deeper pullbacks of more than 1.6%, but none of these indexes reflect the absolute carnage in some chip, growth and technology names. Many of the stocks that were the leaders in the big run up since April were crushed.
The Carnage Under the Surface
I like to use the Innovator IBD 50 ETF (now called CapForce IBD 50 ETF) ($FFTY) as a proxy for high-growth, high-beta stocks. That ETF took a hit of 3.2% and is now close to testing support at its 200-day simple moving average. Rocket Lab ($RKLB), SanDisk ($SNDK), AST SpaceMobile ($ASTS) and Nebius ($NBIS) were all down more than 10% and are good examples of how some of the recent favorites were hit hard.
The main reason the indexes failed to reflect this poor action is because money is rotating back into the safety of a few mega-caps like Apple ($AAPL) and Microsoft ($MSFT) despite their aggressive valuations. Alphabet ($GOOGL) was also looking good but it was slammed after news that the latest version of Gemini has been delayed.
The worst part of the action is that selling accelerated late in the day. The S&P 500 bounced a little but was solid red after being slightly positive after the open. Late-day selling of this magnitude has the aroma of fear. That can help create opportunities but it also presents the problem of downside momentum.
Game Planning
High levels of cash and patience are the way to deal with this but that doesn’t mean you won’t suffer some pain in the positions you continue to hold. If you have little tolerance for downside volatility then it has likely been a miserable day.
The good news is that this is exactly the sort of action I have been speculating about that will create a new flow of opportunities. It won’t happen tomorrow, but this sort of selling, which is driven by liquidity rather than fundamentals, is bound to go too far.
Have a good evening. I’ll see you Friday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
