This Is the Key Market Issue as the New Year Begins

Following a very poor finish in 2024, stocks are set to rebound on the first day of the new year. The much-anticipated Santa Claus rally failed miserably, but technically, the rally period continues for the first two sessions of the new year.

The recent action of the indexes has been quite poor, and there has been little speculative action in low-priced small-cap stocks. This action has been narrow and hasn’t helped the Russell 2000, which was in an ugly downtrend for the entire month of December.

Bigger-cap stocks and the Magnificent Seven MAGS have also been a disappointment the last few weeks. The conventional wisdom has been that the large-cap technology stocks that have been the market’s biggest winners would hold up as investors delayed triggering taxable gains. However, with market concentration in the top-10 names hitting historically high levels, there is increased pressure to reposition to cut some risk.

The biggest question in the early days of 2025 will be whether there is rotation out of the Mag 7 and into the broader market. Many analysts remain very bullish on the big-cap tech names, but valuations are aggressive and the disparity between these stocks and the rest of the market is at historically high levels.

In the final weeks of 2024, there were not many signs of dip-buying in secondary stocks, but with tax-loss selling now over and the potential for some increased selling in Mag 7 names in the new year, conditions are good for some rebound.

While the first couple of days of the year will be chaotic and volatile, next week, we should gain some sense of what market themes will develop as we move into the fourth-quarter earnings season in about a month. There are interesting opportunities out there, but don’t expect them to be simple or easy.

At the time of publication, Rev Shark had no positions in any securities mentioned.