2 Important Reasons Why the Rotation Isn't Going Away
We've gone from the illusion of a bull market, to the illusion of a market correction.
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Following in-line inflationary data on Friday morning, rotational action out of technology and into the broader market continued. There was some bounce action in the Magnificent Seven names, which helped the Nasdaq 100 QQQ to a 1% gain, but both the DJIA and Russell 2000 outperformed nicely, and breadth was very strong with around 7,500 advancers to 1,800 decliners. New 12-month highs have been steadily increasing as well, with over 5,700 names and just 100 new lows.
What is most interesting about this action is that it is the inverse of what we saw for many months earlier this year. Instead of narrow big-cap strength that sends the indexes higher and creates the illusion of a bull market, we have broader small stock strength that doesn’t help the S&P 500 or Nasdaq 100 and creates the illusion of a market correction.
If you focus on smaller stocks like I do, this is the first real bullish action in a long time. Instead of the indexes creating the illusion of strength, we have real strength in individual stocks. The folks in the business media are obsessed with the indexes, so they miss what is really going on, but for the folks in the trenches that are actually trading, this is solid action and the indications are that it will continue.
Two things favor further rotation. The first is that even if there are good earnings next week from Amazon AMZN, Apple AAPL, Microsoft MSFT, and others, there will still be valuation issues that push money into small stocks that aren’t stretched either technically or on valuation.
The second issue that favors rotation is that there are more signs of economic slowing and a greater likelihood of interest-rate cuts. The Fed meets on Wednesday, July 31, and there is a good likelihood they will signal that rate cuts are coming very soon.
We have a slew of earnings reports, economic news, and the Fed next week, so there will be plenty of catalysts to move things around. This is a market for stock pickers, and I plan to be very aggressive with my trades next week.
Have a great weekend. I’ll see you on Monday
At the time of publication, Rev Shark was long AMZN.
