Rotation into Small-Caps Gains Momentum, Mega-Caps Take a Rest
The strength in secondary stock drove positive breadth and led more than 1,500 stocks to new 12-month highs.
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Money rotated into the Russell 2000 small-cap index IWM on Wednesday while the senior indices and the Magnificent Seven MAGS rested after hitting new highs on Tuesday. The strength in secondary stock drove breadth to three-to-one positive and produced over 1,500 stocks at new 12-month highs.
The business media continues to be focused on the disproportionate weighting of the mega-cap technology stocks in the indices, but the recent story of the market has been the pockets of momentum in small stocks. Even when breadth has been weak, there has been an unusual number of small stocks moving up more than 10%. Part of this is due to the small-cap earnings season, but another part of it is traders trying to outperform in stocks other than the Magnificent Seven, which have been relatively weak compared to the indices.
Small caps are lagging, but the Russell 2000 is now positive for the year for the first time since February. There are still plenty of names that are good values and not too extended. The question, though, is whether they can continue to outperform if the senior indices struggle. They outperformed on Wednesday, but is this a new theme or just some residual momentum?
There is some economic news on Thursday in the form of PPI and retail sales, but there aren’t many immediate catalysts. The action is slow as the Wall Street vacation season hits its peak, but so far, there are no signs of negative seasonality.
I did a little selling and repositioning on Wednesday, but I will be an aggressive buyer as I find some new opportunities and setups.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
