This Market Might Not Wait for a Rate Cut
Based on recent market action, the market is eager to return to risk on.
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Thursday was nothing short of amazing. For the better part of two years, many investors I've talked with have been watching and waiting for an opportunity to invest more deeply in small-cap and microcap stocks. The problem has always been around interest rates. With easing stuck on the shelf, the risk-reward setup has skewed toward risk regarding smaller names. Now that we’re seeing inflation data trending into the sweet spot that would allow for a rate cut this year, the market returned to risk-on…well, at least for one day.
I had been in the no-rate-cut camp before the election; however, if the current economic data trend continues, September will likely see a quarter-point cut, and I will need to change my view. The market won’t wait for the rate cut to react. Based on Thursday's action, it may not wait until next month’s CPI data. All that being said, we still need PPI numbers to cooperate.
If you’ve been riding the tech uptrends that I’ve been covering this year, Thursday’s action sent the Nasdaq, the semiconductor index and most of the mega-cap 2024 winners down to their 10-day exponential moving averages on big volume. This has been a significant area of support. A few names, like Qualcomm QCOM and Meta Platforms META, even dipped to their 21-day EMA. I would be wary of owning names under their 21-day EMA, as support will be thin for these big winners. If you’ve been using stops, you should have hit some exits or be close to stopping out here.
On the flip side, financials continued its run higher. Gold appears ready to test the recent May highs. And suddenly, the iShares Russell 2000 ETF IWM is within a few dimes of its 52-week high. Gold and financials have enjoyed a strong 2024 already, so strength in those names continues an ongoing trend. The strength in small-caps is new and one day does not make a trend, but if the market embraces the idea of two rate cuts this year, IWM is setup for an explosive second half of the year.
At the time of publication, Byrne had no positions in any securities mentioned.
