Indexes Are Masking Internal Market Chaos
AI-related stocks continue to correct, but rotational action is covering up some significant weakness. Here's the big question for investors.
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The S&P 500 and DJIA are hovering close to all-time highs, but they are hiding some chaotic and choppy action under the surface. There has been persistent, inconsistent rotational activity for some time, and it has not shown any clear signs of resolution to date.
The Great Jobs Report Rotation
A better-than-expected January jobs report triggered another barrage of selling in AI-related software, cryptocurrencies, and some speculative small-caps. Money rotated out of technology and into safer, less-expensive plays in retail, industrials, energy, and a few other sectors.
It has been a challenging market environment for traders due to inconsistent price action. The Magnificent Seven are no longer the market leaders, but the senior indexes are still holding up very well. Stocks such as Caterpillar (CAT) , McDonald's (MCD) , and Walmart (WMT) are doing the heavy lifting, pushing the DJIA to new all-time highs.
Seeking a Healthy Correction
Investors are used to technology leadership, and many have been having a hard time adjusting to this rotational action. Groups such as cryptocurrency and software are still exhibiting signs of stress, but the good news is that it is not broadening out. If anything, the pressure on some AI-related names is boosting the market, as there is rotation rather than massive liquidation.
The big question for investors is how this dynamic continues to develop. The bears believe that pressure on AI and technology will intensify and push the entire market down. So far, the major indexes are disagreeing and showing signs of doing just the opposite.
The bullish view is that AI and technology badly need some corrective action. It may take some time for it to unfold fully, but much of the rest of the market remains very healthy. The very strong jobs number on Wednesday is proof that the economy is in good shape, and there is also hope that the inflation report on Friday will show progress.
The Game Plan
It makes for a very tricky market as the indexes do a very poor job of indicating what is really going on. My focus continues to be on individual stock picking. There has been increased volatility in small-caps recently, making it harder, but there are opportunities in the dips and some very interesting chart patterns to trade.
I continue to hunt for entry points and am positioning for small-cap earnings season, which will pick up over the next three weeks.
We have a mild start on Thursday as investors await weekly unemployment claims and existing home sales numbers.
At the time of publication, Rev Shark had no positions in any securities mentioned.
