Here's What Traders Can Expect as Second Half Kicks Off
As rebalancing ends, positive seasonality takes hold and fundamentals matter again.
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The second half of 2024 starts with several positives, as we await earnings reports.
The most important news as the market starts the second half of 2024 is that the massive rebalancing of various indexes and exchange-traded funds is now over. There will likely be some reverberations as stocks digest the huge trades that took place last week. The most important issue for traders and investors, however, is that valuation and fundamentals will be more important as we move into second-quarter earnings season in the next two weeks.
The first week of July is historically a positive time for the market. This is due in part to positioning by major funds for the remainder of the year, and there always seems to be a positive mood as investors anticipate the Independence Day holiday. Positive seasonality is often self-fulfilling as traders are aware of it and will help to keep things moving.
The primary market issue right now is whether rotational action will start to pick up some momentum. There is quite a bit of speculation that small caps are finally ready to produce some outperformance.
The theory is that small caps are more leveraged to interest rates due to a greater dependence on debt. With some signs that the economy is slowing, there is a greater chance of a more dovish Fed, which will give small stocks a tailwind.
There are still many strategists looking for continued momentum in the big-cap AI-related names. Names like Alphabet GOOGL and Microsoft MSFT hit fresh highs last week, and there is likely to be some positive anticipation of upcoming earnings reports.
Earnings reports from banks will kick off second-quarter earnings season starting a week from Friday. The response to these reports will likely determine the next major market move. The key issue is whether there will be some slowing in forward guidance.
For now, we should see some focus on stocks that have been jerked around by the rebalancing that has been creating unusual volatility for a while. It is an extremely powerful force and has created some substantial mispricing.
At the time of publication, DePorre had no position in any security mentioned.
