Santa Fails to Show, But Sets Up Conditions for Strong Small-Cap Action in 2025
Here's why things may change once the calendar rolls over.
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The stock market headline on the final day of 2024 is the outstanding gains of the senior indexes. The S&P 500 is up around 25%, the DJIA roughly 13%, and the Nasdaq 100 about 28%, although trading at the end of the year has been disappointing. This is the first time in more than 70 years that the S&P 500 has fallen more than 1% twice in the last five trading days of the year. The Magnificent Seven MAGS stocks were not marked up as some experts predicted, and the fear of triggering taxable gains didn’t appear to slow down the selling.
There have been a few pockets of speculative trading with low-priced small-cap stocks seeing some action but it has been narrow and inconsistent. The standard Santa Claus rally has not materialized.
Early on New Year’s Eve, there is a strong rebound in the indexes, with the Magnificent Seven jumping about 0.8% and the Russell 2000 about half that much. There isn’t any significant news flow driving the action. It is just end-of-the-year positioning and has little to do with fundamentals.
The primary market story of 2024 has been concentration in a few big-cap names. It is the most concentrated action since the internet bubble in 2000 but the big difference this time is that the leading stocks have substantial revenue and EPS growth. Unlike during the internet bubble, there are real numbers, although there are plenty of questions about valuation.
In the shorter term, the most interesting technical development is the divergence between the Nasdaq 100 QQQ and the Russell 2000 IWM since the election. Small stocks started very strongly after the Trump victory but collapsed in December, while the major indexes held up relatively well.
Small stocks are oversold at this point, and the key question is whether the January Effect and the end of tax-loss selling will benefit the group. Once the calendar rolls over, there will be more pressure to take profits in the high-flying mega-caps, so conditions for a rotation will be good.
First, though, we need to navigate the very random action on the last day of the year. However, in a few days, the potential for rotation into the many lagging stocks will be very strong.
At the time of publication, Rev Shark had no positions in any securities mentioned.
