Here's How to Ride the Market's Roller Coaster
These two key events could shape how things play out from here: the Fed meeting and earnings — including tonight's report by Netflix.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Unusual and large market moves typically lead to more large and unusual market moves. There have been two examples of extreme action in the past week. The first was a massive rotation into small-cap stocks that left the Russell 2000 at a record level of overbought. The second was the sharpest drop in the Nasdaq 100 stocks QQQ since December 2022, triggered mainly by concerns about governmental moves that will impact semiconductor manufacturing in China and Taiwan.
These big shifts have shaken the market out of the pattern of narrow big-cap index strength, but the primary issue now is whether new trends and themes will evolve.
Two factors will help to determine how the market develops from here. The first is earnings. Netflix NFLX will kick off major reports from the key technology names on Thursday night. In the next two weeks, nearly all the Magnificent Seven and key Nasdaq 100 names will report. At the start of August, small-cap earnings reports will dominate.
In addition to earnings, there is growing confidence of a Fed interest rate cut at its meeting in September. No one expects any major policy moves at the next Fed meeting on July 31, but it will have an impact on expectations of two cuts by the end of the year.
The market is now digesting a major move into smaller stocks and a major move out of big-cap technology and semiconductors while it tries to gauge whether earnings news is going to produce a sell-the-news reaction or trigger some renewed optimism for the favorite AI-related names.
The most likely outcome as these events develop is a surge in volatility. There is plenty of big money that is still quite content to hold on to the big cap names that have been the star of the show for so long. They might be expensive, but they are "high quality," and they have had the safety of relative strength for a long time.
On the other hand, small caps have languished for years and are finally breaking out of a trading range. Lower interest rates and a slowing economy will favor these stocks that have been out of favor for so long but offer some great valuations.
My best advice is to be ready to take advantage of increased volatility by using shorter time frames to buy dips and sell rips. Use sell-offs like we had on Wednesday to add to favorite names, but use the bounces to reduce position size.
The good news is that astute stock picking should be rewarded.
At the time of publication, DePorre had no positions in any security mentioned.
