As Big Tech Stumbles, Money Is Flowing Into Smaller Stocks

The Magnificent Seven stocks have lost their magnificence. While that is causing some problems on the surface, it is a positive development for much of the market. 

Money continues to flow into the Russell 2000 IWM, which is up 0.4%, while the Magnificent Seven names MAGS are down about 1.1%. Other technology stocks such as Dell Technologies DELL and Autodesk ADSK aren’t helping, but there are still pockets of speculative trading, with my little favorite Xeris Biopharma XERS jumping 7.5%

Breadth is running is running more than 2 to 1 positive, and there are over 675 new 12-month highs. By comparison, Nasdaq 100 QQQ breadth is about 40 gainers to 61 losers.

The bearish spin on this action is that big-cap technology is going to drag the entire market down. The indexes are expensive in large part due to the elevated valuation of the Mag 7, but valuations for much of the rest of the market are much more reasonable.

It is particularly interesting that money is flowing out of an institutional favorite like Nvidia NVDA and into speculative favorites such as Bitcoin IBIT. It reflects a hunt for cheaper stocks that have been ignored for years.

This sort of limited corrective action is very healthy and should help provide a favorable technical setup for the end of the year.

My game plan is to take some profits into strength when I can, but I already have fairly high cash levels. I am interested in buying Nvidia and IBIT on pullbacks for the longer term, and I also want to be more aggressive with some small-cap buys as the charts work off overbought readings. 

I believe we are entering into a phase of small-cap outperformance that may last for a few months. That means quality stock picking will be extremely important. Small stocks don’t all move in tandem, but those that do move tend to move big.

At the time of publication, Rev Shark was long DELL, XERS, NVDA and IBIT.