They Used to Be Magnificent. Now They're Mediocre and Leading the Market Lower.
Time for a renaming of these former leaders. I've got an idea. Meanwhile, amid tariff drama, get ready for more voilatility next week as we move into small-cap earnings season.
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A combination of issues hit the market on Friday and killed the bounce action that began after the tariff scare on Monday. The market had been doing a fairly good job of shrugging off weakness in the Magnificent Seven names MAGS, but speculation in small stocks became a little too frothy and left them vulnerable to bad news.
Amazon's AMZN earnings report was the first issue, as the numbers did not meet expectations, and capital spending had to increase dramatically to handle the demand for AI. The stock fell 4% on the news.
On Friday morning, the January jobs news was a little soft, but wages were higher than expected, which triggered an uptick in interest rates. In addition, revisions to the jobs numbers have basically wiped out all the supposed job growth in 2024. The job market was never as strong as was reported, which is probably part of the reason why so many Americans were complaining about the poor economy.
Later in the day on Friday, stocks took another hit on headlines that President Trump is expected to impose "reciprocal" tariffs next week. This is nothing like the broad and indiscriminate tariffs that many economists have been warning about, but the word "tariff" evokes a negative reaction.
Once the selling took hold, it gained traction for the rest of the day. At the close, breadth was extremely weak at around 2,200 gainers to 7,400 decliners.
Most notably, the Mag 7 lost more than 2%. At this point, the only stock in the group that can be called magnificent is Meta Platforms META, which is up 14 straight sessions. We probably should rename this group the "Mediocre Seven" because they are going to need a lot of work before they will have much technical appeal.
One big positive this week is that the money coming out of the Mediocre Seven flowed into the rest of the market. The Russell 2000 exhibited good relative strength, and there was some very bullish action in secondary stocks. The poor action on Friday caused a give-back in many of these stocks, but it is too early to proclaim that the rotational action is over.
Next week, we move into earnings reports for small companies, so no matter what happens, there will be increased volatility in some names.
The positive spin on this action is that the most expensive and technically extended stocks, which were the Mag 7, are correcting, and the market is rotating into cheaper and technically strong names. That is bullish, but the media is obsessed with the big-cap technology names and doesn’t understand this.
Have a great weekend. I’ll see you on Monday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
