The Real Story of the Stock Market You're Not Hearing About
Traditional business media aren’t covering what's really going on right now. Here's what to know and my game plan to play it.
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As is often the case, the mainstream business media is missing what is really happening in the stock market right now. That isn’t too surprising, since their primary focus is on the movements in the S&P 500, DJIA, and Nasdaq 100. All three of those indexes were close to flat on Thursday; therefore, the primary coverage was about how employment data was not as bad as expected, there is still a great likelihood of a Fed interest rate cut next week, and not much was happening.
The real story of the market, however, was pockets of very aggressive rotation into small stocks. While the Magnificent Seven (MAGS) struggled and breadth was barely positive, traders were actively chasing a wide variety of smaller stocks.
Many of these stocks had been dragged down along with the AI sector when valuation issues recently erupted, but much of this selling was driven by index and ETF pressure and had little to do with valuations. Some of these small stocks have been mispriced due to index pressures, and traders have been taking advantage of the opportunities.
In addition, many aggressive traders are anticipating the typical positive December seasonality, so they have been buying many smaller stocks that are well off their fall highs. Indeed, the action was so hot that it was a bit frothy in places, which can lead to increased volatility. Still, it suggests that, regardless of economic or event risk, money is flowing into some areas of the market.
The biggest problem with small-cap momentum is that it tends to shift quickly. There is almost always a bounce in the Mag 7 or other big-cap technology names after they are substantially underperforming small-caps for a short period of time.
I expect to see traders digging for more underperforming small-caps, but there may be hesitation to chase names that have already made big moves. Small-caps move much faster than other groups, and it is often prudent to take some gains into strength rather than set trailing stops.
My game plan is to be aggressive in not giving back some of the significant recent gains. I am optimistic about positive trading action in the next few weeks and will keep looking for good technical setups, but I’m not willing to be aggressive at chasing new highs.
There is quite a bit of opportunity out there, but it will require vigilance and quick, decisive action to capture it.
We have a slow start as investors await delayed September inflation data, which are too old to matter much at this point.
At the time of publication, Rev Shark had no positions in any securities mentioned.
