S&P 500, Dow Jones Establish Position Ahead of 4 Key Earnings
The major indices moved into position as IBM, Meta, Microsoft and Tesla will reports earnings later this week.
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Reverse rotation continued on Monday as the Nasdaq 100 (QQQ) and Magnificent Seven (MAGS) gained better than 0.4% while the Russell 2000 (IWM) lost 0.3%. The selling in small caps was actually worse than it looked, as some of the recent leaders took the hardest hits. Redwire (RDW) was down 13%, Lightpath (LPTH) 18%, NeoVolta (NEOV) 17%, Critical Metals (CRML) 11% and Draganfly (DPRO) 16%, etc.
Positioning Ahead of the Heat
The S&P 500 and DJIA benefited from strong action in Apple (AAPL) , Cisco (CSCO) , Oracle (ORCL) and financials, which have been laggards lately. Overall breadth was negative, with 53% of stocks declining and new 12-month highs contracting to 265 names.
It was a messy session but largely a function of positioning as we head into the meat of earnings season. Things will heat up on Wednesday night when IBM (IBM) , Meta (META) , Microsoft (MSFT) and Tesla (TSLA) will report. In addition to earnings, the Federal Reserve will report its latest interest rate policy on Wednesday afternoon, followed by a press conference with Fed Chair Jerome Powell. While no rate move is expected, the press conference will be of particular interest due to the tension between Powell and Trump and the likelihood of a new Fed chair being named at any time.
Volatility as a Tool
With small caps overbought after a historic run and the Magnificent Seven oversold after months of underperformance, it isn’t too surprising to see some reverse rotational action.
While the high volatility makes it difficult to hold some positions, it also creates potential entry points for favored names. I was surprised by the extent of some of the drops, but it was more a function of a lack of bids rather than a rush for the exits. I view it as just elevated volatility rather than a shift in trend.
Strategy and Game Plan
From a trading standpoint, it is particularly important to move incrementally in this sort of action since the moves can be much larger than anticipated. Hold some buying power in reserve and don’t be in a rush to buy into the teeth of a decline.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre was long LPTH and NEOV.
