Stock Pickers Are Rotating Into New Sectors Causing a Market Disruption

For quite a while now, the indices have done a poor job of reflecting what is really going on in the market. For months they have covered up the powerful sector action and stock picking. If you haven't been reading Real Money or social media, you would have little idea that some areas of the market have produced strong action since the internet bubble 20 years ago.

This lack of insight cuts both ways, when there is a poor day for the hot momentum names that isn't reflected in the indices either. The action on Thursday was a good example. The cannabis names have been on a rampage lately, but early on Thursday morning, they underwent a dramatic reversal, with Tilray (TLRY) leading the way down. The turnaround was not unlike the reversal in the social media-driven reversal in short squeeze stocks two weeks ago.

Other hot momentum stocks cooled off on Thursday as well, but strength in bitcoin helped to maintain some narrow pockets of smaller cap strength.

This aggressive rotational action is nothing new. It has been going on in the market ever since the FATMAAN names lost their luster after bouncing off the March lows. A herd of small traders and investors - with plenty of help from aggressive hedge funds - have been jumping around chasing the hottest stocks in the hottest sectors for a while now. SPACs, EVs, biotechnology, cannabis, and cryptocurrencies have all benefited at various times.

There have been ongoing rotations taking place under the surface of the indices, and it has been a great deception for the big picture pundits that fail to look at all the individual elements that are at work. We keep hearing how the market is overbought and frothy, but without understanding the sector rotation and stock picking, these observations are of little value.

Another consequence of this action is that it has created very robust sentiment as small traders have been able to find plenty of hot action to chase as long as they stay nimble. There is plenty of buying power out there, and it continues to move around very quickly.

The market is dealing with the sharp rotational action that occurred yesterday, and that is causing a little pressure on the indices. There is some concern that the market is due for some broader corrective action, but until there is a shift in the intensity of the stock picking, it is going to be difficult for the bears to gain downside traction.

My game plan is to stay focused on stock picking but to tighten up some stops in the sectors that are struggling, such as SPACs. We need to see where the stock-picking traders move next, and that may not be immediately clear.

At the time of publication, James "Rev Shark" DePorre had no position in the securities mentioned.