Strong Speculative Action in Smaller Stocks Is Driving Positive Market Action
Conditions are good for a continuation of the positive trend into the end of the year, but a number of issues may cause elevated volatility.
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The market is pausing on Tuesday morning as it digests the biggest two-day gain since June. Worries about regional bank lending, trade with China, and a government shutdown have abated, but have not gone away. There is also concern about upcoming earnings and a Supreme Court ruling on the legality of President Trump’s tariffs.
The recent market pullback and recovery illustrated that there is still a high level of demand for more speculative stocks. There is some very intense rotational action occurring that is driving small stocks and some groups that have lagged badly for a long time, such as biotechnology.
While conditions are very good for a continuation of the positive trend into the end of the year, there are a number of issues that may cause elevated volatility. The first will be earnings, which picks up traction Tuesday night with results from Netflix (NFLX) . It is very likely that the bears will be looking for a "sell the news" reaction to reports from the Magnificent Seven (MAGS) names.
Investors are more optimistic that Trump will eventually work out a deal with China, but that is not likely to happen quickly or easily. There will be bumps in the road and more market reactions as the negotiations take place.
One of the biggest events coming up soon will be the Supreme Court ruling on the legality of Trump’s tariffs. Betting markets are showing odds of around 60% that Trump will not prevail. However, the Trump administration is devising a number of workarounds to deal with this issue, which is why it isn’t hurting the market at this point.
The most impressive aspect of the action on Monday was the high number of smaller stocks making big moves. The Russell 2000 is illustrating very good relative strength and has its best relative performance in years. These periods of small-cap outperformance don’t tend to last long, but they can be very profitable for aggressive traders when they do occur.
We have a quiet start on Tuesday morning as investors contemplate upcoming earnings.
At the time of publication, Rev Shark had no positions in any securities mentioned.
