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Big-Cap Stocks Continue to Be Favored Because of Their Relative Strength

Earnings are causing increased volatility, but investors still favor the large-cap names.
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Earnings season is heating up and causing increased market volatility. On Wednesday, Netflix (NFLX) and ASML Holding (ASML) posted very strong reports and helped trigger a frenzy of buying semiconductor stocks and some big-cap technology names.

The action was too emotional and frothy, though, and some selling ensued as the day progressed. By the close, breadth was solidly negative, with about four gainers for every five decliners, and the Russell 2000 (IWM) stumbled with a loss of around 0.8%. It was another narrow session with big-cap names covering up underlying weakness.

On Thursday morning, a weak report from Tesla (TSLA) is impacting sentiment, but that is being offset to some extent by very good results from IBM (IBM) . IBM isn't nearly as important as Tesla as far as sentiment, but it reinforces the strength of pure technology. As a result, semiconductor names such as Nvidia (NVDA) and Broadcom (AVGO) remain strong.

In addition to the volatility caused by earnings, there also is some movement due to interest rates. The 20+ Year Treasury Bond Fund (TLT) reversed sharply lower Wednesday after a gap up, and the ECB continues to emphasize that rate cuts are not coming soon. The chances of a Fed rate cut in March have declined from a near certainty a few weeks ago to about 42% Thursday morning.

Much of the rally in November and December was due to the belief that the Fed was going to start cutting rates In March. That hope has steadily eroded, but it has not had much impact on the indexes. It has hurt small-caps, which are more economically sensitive and leveraged to interest rates, but investors who are looking for safe havens have continued to pile into big-cap technology and large-caps in general primarily because they have the best relative strength.

We are going to continue to see some increased volatility next week as major earnings reports roll in, but the big-caps are still heavily favored simply because they have been performing best. That is not going to change that quickly or easily.

We have some softness Thursday morning, but the Nasdaq is set to open positively even though Tesla is disappointing.

At the time of publication, Rev Shark was long NVDA.