The Market Might Just Be Smiling on Traders
After years of waiting, we might finally be getting stock-picking-driven market.
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There are two basic ways to characterize the stock market — it is either bullish or bearish. That is convenient when you are writing headlines or talking about the market in general, but it really doesn’t provide any helpful information for investors who are trying to navigate the movement and make money.
A more helpful characterization is to view the market as either index- and macro-driven or stock-picking-driven. Most of the time, the market is driven from the top down. Big groups of stocks move in tandem due to economic issues or shifts in sectors. What moves a particular stock is the index, exchange-traded fund, or sector that it is in rather than its individual merit.
There are certain times when individual stock picking dominates the action. This often occurs when a major cycle shift has taken place, and now investors are trying to find ways to maximize profits by finding stocks that have been mispriced or have not received much attention.
We have had a taste of what a stock picker's market feels like lately, as rotational action has gained traction as hopes for a rate cut have accelerated. Money has been shifting into smaller stocks, and investors are looking to maximize profits by finding those stocks that offer the best values and charts. There has been a sudden interest in many biotechnology names that have languished for years. There really was nothing wrong with many of the names, but the market simply didn’t appreciate them or have any interest in them because its macro conditions favored the semiconductors and AI names instead.
Are we entering a period where stock picking is going to matter more? We won’t know until we have a few ups and downs in the weeks ahead, but earnings season tends to favor stock pickers as it creates a new crop of opportunities.
I consider myself to be primarily a stock picker rather than a market timer, so I am biased and hoping to see more interest in individual stocks rather than broad themes that favor big caps like AI.
We are now on our fourth-straight day of small-cap outperformance, and we are probably seeing some consolidation soon. The issue is whether the market will rotate back into the same old big caps or whether a rest helps to set up charts for more stock picking.
Small caps have been in a bear market for years and are finally starting to show signs of life. If they do continue to improve, then it will be a great environment for stock pickers.
At the time of publication, DePorre had no position in any security mentioned.
