Rotation Into Dow and Smaller Stocks Picks Up as Market Uncertainty Rises

Market action on Tuesday was mixed, with some rotational action out of the leading names and into lagging groups. Biotechnology and the Russell 2000 IWM saw some early strength as the Magnificent Seven struggled and the Nasdaq 100 QQQ lost 0.7%. The Dow Jones Industrial Average, which has not made a new high like the S&P 500, outperformed with a gain of nearly 1% but still is lagging the other major indexes.

This rotational action is a reflection of increasing concerns that the growth stocks and technology names that were the big winners in the second quarter may need to reset as we head into earnings season. The best bargains are in the groups that have lagged, which includes the DJIA and the Russell 2000.

The market has already been dealing with very large shifts due to index balancing, window dressing, and new month inflows. Some of Tuesday's action was a reversal of those moves and will be less of an influence as we move forward.

With the July 4 holiday beckoning, volume will slow substantially. The market is closing at 1 p.m. ET on Thursday and then all day on Friday, July 4, so there is only a day and a half of trading left this week.

However, there will be one big event on Thursday morning when the June employment report is released. Weakness there could have a significant impact on the likelihood of a Fed rate cut this year.

One issue to keep an eye on is weakness in the dollar. The dollar hit new multi-year lows and is back to levels that it hasn’t seen since early 2022. The weakness of the dollar helps to prop up stocks because stronger foreign currencies can be used to buy more.

This is not an easy trading environment, and the thinner volume is not going to help.

Have a good evening. I’ll see you Wednesday.

At the time of publication, Rev Shark had no positions in any securities mentioned.