The Rally Rampage Continues, But Is It Too Euphoric?
There are two primary questions about the market right now. Here's my game plan.
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The post-election celebration continues on Monday morning, with the Russell 2000 IWM small-cap index and Bitcoin IBIT leading the charge. Big-cap technology names are positive but lagging with Nvidia NVDA and several others indicated lower, although a big jump in Tesla TSLA is offsetting that weakness.
There are two primary questions about the market right now. The first is how much longer this rampage can continue without a rest, and the second is whether small-cap and more speculative names will continue to outperform.
Large-cap names and the Magnificent Seven, in particular, have been outperforming small-caps for years. Currently, the S&P SmallCap 600 is trading 25.4% cheaper than the S&P 500. Similar gulfs in valuation occurred in 1976, 1998, 2001, and 2020. 2020 was the bottom of the Covid crisis, and small-cap stocks went on toa year-long period of superior performance.
In the short term, the action is becoming frothy and will be difficult to sustain, but that doesn’t mean that there will be a sudden downside reversal. It is more likely that there will be churning action as underinvested bulls buy dips and try to find ways to increase market exposure without chasing runaway momentum. I expect some strong support to form and hold for a while.
Speculative juices are flowing, and that typically means more pockets of big percentage movers among smaller stocks. Bitcoin and Bitcoin-related names such as Coinbase COIN, Core Scientific CORZ, and MicroStrategy MSTR are the runaway leaders on Monday morning.
While navigating the short-term momentum will be difficult, the more important question is whether this is the start of a new uptrend that will run for a while. The indexes are already at all-time highs, and many bears are concerned about valuation, but that is why the undervaluation of small-caps is so important. There are still many stocks that are not grossly overvalued and have the potential to grow depending on the success of Trump administration policies.
My game plan is to stick with the strong momentum as long as possible but to take some profits into the biggest moves. I’ll be focused on dip buying and expect to see some pullbacks quite soon.
Technically, what we have to watch are the many gaps in the charts that have been formed by this euphoric action. Gaps typically act as a magnet and are often filled just as a matter of normal volatility. That can present good opportunities when looking for entry points, and it can also be helpful to scare out some of the weak bulls that have been undisciplined by recent buys.
Astute stock pickers who stay patient and look for technically strong entry points should do well.
At the time of publication, Rev Shark was long IBIT and CORZ.
