A Classic Bull Trap to Start the Year
This market looks quite different when you look under the hood at smaller stocks.
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The first market day of 2025 was a classic bull trap. After a rough finish in December, investors were looking for a quick rebound in the new year. The indexes jumped higher at the open and sucked in some bulls, but it was downhill the rest of the day. The Magnificent Seven MAGS were laggards with a drop of about 0.4%, and the DJIA had an intraday decline of over 700 points before a late rebound stemmed some of the damage.
The good news is that breadth was surprisingly strong and was close to even at the close due mainly to strength in smaller stocks. This strength was reflected in the Russell 2000 IWM, which closed with a small gain.
Now that the calendar has rolled over, some positioning moves are still being made, but there is increased interest in stock picking. Smaller stocks are oversold after a drubbing in December, and many of them have decent charts with good support. The end of tax-loss selling pressure is also a benefit for these names. There was a very long list of single-digit stocks making moves of more than 10%.
The Mag 7 names are of less interest as they deal with profit-taking and questions about valuation, but the market looks quite different when you look under the hood at smaller stocks. They are not extended or overbought like their big-cap cousins.
Conditions are good for continued interest in stock picking, and the lowest-priced names benefit the most.
Have a good evening. I’ll see you Friday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
