Small-Cap Names Benefit From Rotation Out of Big-Cap Growth Stocks

Early selling on Tuesday in some key growth stocks and semiconductor plays initially appeared to drag down a very extended market, but, once again, the bulls rallied intraday and delivered a close near the highs. 

Small caps IWM led with a gain of almost 1% which was reflected in breadth of about 7,000 gainers to 2,900 losers. New 12-month highs dropped slightly to around 400.

The Magnificent Seven MAGS and the IBD 50 Fund finished in the red as money rotated out of some of the leading growth names. However, the good news is that money rotated into other areas of the market and prevented any notable weakness in the indices.

Like many others, I thought that the selling might pick up some traction after the weak start, but the market reverted to the recent pattern of gaining strength all day and closing strong. Breadth was never negative because of the small cap strength.

There was more talk today about unusual strength in some "junk" names, but the list of stocks moving up more than 10% was relatively short in view of the Russell 2000 strength.

The reaction to earnings on Wednesday is going to be of particular interest when Tesla TSLA and Google GOOGL report after the close. The weakness in growth names on Tuesday is a sign of some nervousness about whether the numbers will be strong enough to keep this rally going, but the rotation into other areas outside of the Magnificent Seven is a positive sign.

Although the indices are sitting near highs, this is a very difficult market to trade. The risk of a pullback is very high, and prudent entry points are very difficult. I raised some cash today with sales on Tuesday morning and expect to wait a while before I find better places to deploy it.

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

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