Small Caps Are Where the Money Is Going

The bad news on Tuesday was that selling in the senior indices increased with the Nasdaq Composite down 0.6% and the S&P 500 dropping 0.4%. The good news is that money rotated into small-cap stocks. The Russell 2000 (IWM) gained 0.3% and market breadth was 55% positive. There were 185 new highs to 100 new lows.

The chart of the Russell 2000 looks promising but volume is light and that increases the danger of a failed breakout.

Wednesday Is the Test

My main concern with the market is the lack of positive catalysts as we head into seasonal weakness. We will have a test on Wednesday morning when the July CPI numbers are released.

CPI has been lighter than expected over the last few months and there is the likelihood that lower oil in July may produce a light reading again. However, that is not a big secret and the bond market doesn’t seem to think that inflation is going away. We will see on Wednesday how this shakes out.

Rotation Is Still Working

Regardless of what happens on the macroeconomic front, we still have this positive small cap action. The number of stocks up more than 10% fell quite a bit so the intensity has diminished but the flow is still there and there doesn’t seem to be many alternatives.

The Magnificent Seven was down about 0.9% but the semiconductors did manage a small bounce. Technology continues to be a tough sector to trade. On the other hand, biotechnology (IBB) hit a new all-time high again.

Game Plan

My game plan is straightforward. I’m focusing on small caps and biotechnology because that is what is working. I have quite a bit of cash to work with and I’m selective with my buying, but I’m watching the rotational action and not the senior indices that the popular business media is always yammering about.

Have a good evening. I’ll see you tomorrow.

At the time of publication, DePorre had no positions in any securities mentioned.