The Indexes Are Struggling, but Stock Picking Is Improving
Rotation out of big-cap technology and rebalancing of the Russell indexes will help keep speculative interest high.
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A surge in end-of-the-month buying bailed out the major indexes on Friday, but there has been growing technical damage as a rotation out of big-cap technology stocks has gained traction.
The market struggled Friday following a PCE inflation report that was slightly better than expected. The Nasdaq 100 QQQ was lagging again due to a poor response to Dell's DELL earnings, which came a day after a disappointing Salesforce CRM report. According to Goldman Sachs Prime desk, hedge funds have been shorting technology stocks at the fastest pace in 11 weeks as the glow of Nvidia's NVDA great results fades.
The good news is that the money coming out of technology has been rotating into other areas of the market that have lagged for a long time. Breadth has been quite strong recently, primarily due to the relative performance of the Russell 2000 small-cap index IWM.
There has been more speculative trading in meme stocks and some ultra low-priced stocks, but there is also more interest in many of the smaller names that have good fundamentals but have been hindered by the narrow strength of the Magnificent Seven stocks.
What is particularly interesting is that economic concerns have not hurt this rotational action. Typically, in the last couple of years, money has piled into the Magnificent Seven and semiconductor names when economic worries flare up. These names are viewed as less economically sensitive since most don’t have any substantial debt, and they are enjoying the AI tailwind. The valuations may be aggressive, but the relative strength creates an aura of safety.
We have various economic news coming in the next couple of weeks, so we will see how this impacts the action. However, there is reason to be optimistic about continued interest in stock picking in secondary names.
The Russell indexes will be rebalanced at the end of June. This shift always produces one of the biggest volume days of the year, and it also creates interesting technical action in dozens of stocks that are being added to the Russell 3000. I’m reviewing these candidates and will share what I consider some of the best charts.
It is quiet early on Monday morning, but the first trading day of a new month tends to have a positive bias.
At the time of publication, Rev Shark had no positions in any securities mentioned.
