Small-Caps Come to Life and Stock Pickers Rejoice

Strong bank earnings and a weaker PPI report gave the market a shot of adrenaline on Friday. The most notable aspect of the action was a very strong rotation into smaller stocks. The Russell 2000 gained more than 2% and pushed breadth to better than four to one positive. More than 1,100 stocks hit new 12-month highs.

Some of the small-cap strength was due to smaller banks, which are a relatively large component of the Russell, although other groups such as biotechnology and Bitcoin enjoyed big moves as well.

The biggest laggards were large-cap technology names, including Tesla TSLA, Apple AAPL, Microsoft MSFT, and Broadcom AVGO. As a group, the Magnificent Seven (MAGS) declined around 1%.

It is very encouraging to see this shift as it illustrates that we are no longer blindly chasing big-cap AI names regardless of valuation. The market has a totally different and much more positive feel when the smaller stocks come to life. It stirs up the animal spirits when the speculative juices are flowing.

The big question now is whether small-caps can continue to lead as we head into the meat of earnings season. The next three weeks are primarily focused on big-cap reports before smaller names report in the first half of November.

If the big-caps do not generate upbeat responses to their reports, that may help fuel further rotation into smaller stocks.

There isn’t much economic news on the agenda next week, but the continued weakness in bonds and higher interest rates will fuel more debate about economic conditions. There are signs of a slight rebound in inflation as well as some economic slowing. At least one Fed member has stated that there should not be a rate cut at the next meeting in November.

Be ready for some better stock picking next week.

Have a great weekend. I’ll see you on Monday.

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