Small-Caps Keep Historic Streak Alive
The close was a little weak, which is a concern, but don’t underestimate the power of momentum. Here's how to deal with an overheated market.
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The Russell 2000 (IWM) small-cap outperformance continued on Thursday. The little guys are up in 10 of the 13 sessions in 2026 and have outperformed the S&P 500 every day so far this year. Breadth was solid again with about 62% of stocks rising and new 12 month highs expanded to over 550 names.
One difference on Thursday was that some of the flow out of the Magnificent Seven (MAGS) names reversed. MAGS had its best day of the year with a 1.6% jump but the Nasdaq 100 (QQQ) couldn’t keep up with a gain of 0.7%.
Benign Inflation Boosts Bonds
The economic news and the PCE inflation report on Thursday was benign and that helped to boost bonds (TLT) and lower interest rates. There is still a near zero chance of the Fed cutting rates next week but it will make it much easier for the Fed to cut rates down the road if there is some economic slowing.
The Bear Case for Froth
With small-caps on a historic run, the contrarian bears are yammering about frothy and unjustified action. The view is that dumb retail buyers are piling on and they have no awareness of valuations or risk.
The vast majority of the time the dumb herd of retail investors is right but what most of the superior bears fail to acknowledge is that these trends almost always last longer than they think they will. It is very easy to underestimate how far strong momentum can carry stocks.
Riding the Momentum Wave
There are two ways to deal with an overheated market. You can sell in anticipation of a top or you can keep riding the trend as long as possible and sell at the first sign of technical weakness. I prefer the latter approach.
Momentum traders in the right stocks can build a very big cushion of profits and they will still be far ahead if they give some back on a market turn. On the other hand, the anticipatory bears will miss out on the late trend where some of the biggest gains occur.
Guarding Your Gains
The best move at this point is to increase your vigilance and be ready to hit the exit button on early signs of technical weakness. The most important thing to do is to try to keep accounts as close to highs as possible. Nothing is more unproductive than making up losses.
We had a weak finish to the day, which is a slight warning sign, but it has been a great run and the bulls have earned some rest. Don’t confuse consolidation with a market top.
Have a good evening. I’ll see you Friday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
