A Divergence Ripe for Reversal
Tech stocks look poised to regain momentum Thursday, with the small-cap rally set to pause. Here's how I'm navigating it all.
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The story of the market in the early days of 2026 is rotation into small-caps. So far in the first nine trading sessions of the year, the Russell 2000 small-cap index (IWM) is up seven of those days and has gained 6.9%. By comparison, the Nasdaq 100 (QQQ) , which is heavily weighted toward big-cap technology names, is up 2%.
This substantial outperformance by small-caps is a product of some of the most significant rotations out of AI stocks that have occurred since the group has become leaders.
A Divergence That Is Ripe for Reversal
The key question now is whether this rotation continues and how it evolves from here. The divergence between IWM and QQQ has reached a level where at least a short-term reversal would not be surprising. All it takes is a catalyst, and we appear to have one emerging on Thursday morning.
Semiconductor Strength Provides the Spark
Taiwan Semiconductor (TSM) reported a record quarter on Wednesday, with both revenue and earnings per share exceeding expectations. Management also delivered strong forward guidance. In addition, the White House acknowledged the need for some flexibility on tariffs to support the buildout of U.S. infrastructure.
That combination is fueling a global rally in semiconductor stocks, including ASML Holding (ASML) , Micron Technology (MU) , Broadcom (AVGO) , and Advanced Micro Devices (AMD) . The semiconductor ETF (SMH) is pushing to a new all-time high, and the Magnificent Seven (MAGS) is bouncing after feeble action on Wednesday.
Expect Volatility as Rotation Continues
While the rotation out of large-cap technology and into smaller stocks is likely to remain a theme, it will almost certainly be volatile. Small-caps have higher betas and tend to move much faster than large-cap stocks. They are also more heavily influenced by short-term speculative trading.
Earnings Season Will Shape the Next Move
Another major factor influencing rotational action is the fourth-quarter earnings season. Banks have already begun reporting, and results have been disappointing so far. The next major wave of earnings will come from the S&P 500 and large technology companies, followed by reports from smaller companies later in the season.
We have seen considerable sell-the-news behavior following bank earnings. However, the recent underperformance of the Mag 7 has lowered expectations and created the potential for positive surprises, similar to what we are seeing from Taiwan Semi Thursday morning.
Navigating a Stock Picker’s Market
My game plan remains focused on navigating the volatility created by this rotational environment. That means managing positions tightly, taking profits into strength, and avoiding the loss of hard-earned gains.
This remains a stock picker’s market. There are still a number of interesting technical setups, along with some genuinely attractive values among smaller stocks.
Technology stocks appear poised to lead on Thursday, while small caps take a well-deserved rest.
At the time of publication, Rev Shark had no positions in any securities mentioned.
