The most notable characteristic of the market action recently has been the intense focus on hot sectors and individual stock picking. Small investors and traders have been aggressively chasing cannabis, bitcoin and other names without much regard to valuations, fundamentals or anything else.
On Wednesday, the aggressive chasing of small stocks continued, but the action narrowed and intensified. Social media was even more aggressive in chasing some of the small junk names, a trend continuing here on Thursday morning. There is a concerted effort in discord chat rooms and on wallstreetbets to focus on certain small stocks, particularly in the cannabis sector. The short-squeeze trade that was so successful is over, and now the focus is pushing low-priced, small-cap stocks.
One consequence of this action is that some companies are using the strength to do registered direct offerings. That can quickly kill the momentum, but the intense focus on particular stocks is creating Ponzi scheme-like trading. As long as traders are confident that other traders will stay focused on a specific name, they can push it even higher.
Two weeks ago, when the short squeeze of GameStop (GME) and a few other stocks was the focus, it hurt the broader market’s action. It was just a distraction, but it also helped create some rotational movement that turned out to be a much-needed correction. The corrective action caused by the social media short squeeze helped to create the favorable technical conditions that took the indices to new highs this week.
This focus on small-cap momentum is disrupting some of the more standard market analysis right now. Overbought readings and many technical considerations are being ignored because the most dominant action is just a crowd of traders shifting their buying power from one name to the next.
There are two very different markets right now. The broad, overall market has been hitting highs but is a bit sluggish and is seeing some mixed rotational action. The second market is the hot sectors such as cannabis, small-cap biotechnology and bitcoin that are the focus of intent trading. This market remains extremely bullish, but the trading action is shifting so quickly that many folks simply can’t keep up.
My focus for quite a while now has been on stock picking in the hot small-caps. That has been working exceptionally well but it is becoming more challenging as the big movers now are the very lowest-quality names.
An excellent example of what is happening is that Canadian cannabis names have been much stronger than most other cannabis names. The main reason for this is that most of the quality U.S. cannabis names are listed on the Over the Counter (OTC) market. There are no options on these stocks, and brokers such as Robinhood won’t allow them to be traded. Social media is aware of this, so it focuses on low-priced stocks that have Nasdaq listings. It has nothing to do with fundamental quality.
I will stay focused on stock picking and will be working hard to keep accounts as close to all-time highs as possible. The market is narrower and it is crucial to be selective with stock picks, but there are still are no signs that a reversal is about to occur.