Small-Caps Set Up for a Breakout as Major Catalysts Are Brewing
The Mag 7 is dragging, but some names have changed to value plays from momentum darlings.
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The major equity indexes have been struggling but holding important support levels as investors await several significant catalysts. While the AI wrecking ball and capex issues are still in flux, selling pressure has relented while investors try to sort out the winners and losers.
What has been most significant about the recent market action is that the major indexes have held up nicely while some deep bear-market action has played out in key stocks under the surface.
Most notably, the Magnificent Seven is no longer magnificent. The group found some support at its 200-day simple moving average and is holding there for now, but it is precarious at best. This is not an attractive chart, but some of the Mag 7 names have turned into value plays rather than momentum darlings.
Small-Caps Flash Signs of Life
While there is quite a bit of grumbling about poor recent market action, there are some bright spots. Small-cap stocks have been the leaders in 2026, and the chart of the Russell 2000 ETF (IWM) is quite attractive. There is a narrowing range of consolidation and, if a positive catalyst hits, there is a nice setup for a breakout.
Catalysts: Tariffs, Tehran, and the Fed
There are several significant catalysts on the horizon that are going to shape what the market does next. One of the most interesting is the Supreme Court ruling on tariffs that could hit as early as Friday. Some pundits believe that the court may hold off until after President Trump’s State of the Union address on February 24 to avoid a personal confrontation.
Another key issue is a significant military buildup in Iran. It is being reported that Trump is considering a limited initial strike to push Tehran into a deal. Oil continues to rise and precious metals are strengthening again.
The most immediate catalyst is the PCE, GDP, and new home data due on Friday morning. GDP is expected to come in around 2.5% annualized, which would be a slowdown from the 4.4% in the third quarter but still quite healthy. There is some concern that PCE inflation could run hot, and that will have an impact on expectations of a Fed rate cut. A hot number would produce a negative response, but it may be what is needed to help clear the air.
Game Planning
It is a difficult market right now with very few stocks producing sustained upside momentum. Charts are building, like the Russell 2000 above, but patience is needed.
At the time of publication, Rev Shark had no positions in any securities mentioned.
