The Real Bull Market Stands Up as Great Rotation Gains Steam
Two factors are driving this action — and one of them is becoming even more important.
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After many months of the senior indexes hitting new highs due to strength in a small number of AI-related big-caps, a real bull market has finally developed. There has been a massive rotation into the broader market and small-cap names in particular.
Breadth was stellar again on Tuesday, with more than 7,600 stocks advancing and 1,700 declining, but the most notable statistic is that over 1,750 names hit new 12-month highs.
The Russell 2000 has moved out of a trading range and is now at its highest level since early 2022. It still has a way to go to return to the highs hit in 2021, but it has strong momentum and can easily make another push higher after consolidating some recent gains.
Two factors are driving this action. The first is that it is now nearly 100% certain that the Fed will cut interest rates at its meeting in September. Lower rates are a big boost to smaller stocks that don’t have the cash levels of big-cap technology names and must constantly raise expensive capital.
The second factor is that the valuation disparity between big-cap tech and everything else has grown too large to ignore. Stocks such as Apple AAPL have very extreme valuations, but they have attracted investment because they have outperformed for a long time and feel safe. The price action is what attracted investors, but now that it is slowing, valuation is becoming more important.
Earnings season, which is picking up steam now, will have further impact on the valuation issue. Expectations are very high for big-cap tech, and if it doesn’t exceed estimates, there is likely to be more rotation action.
While things are getting a little extended now, and we are due for some pullbacks and consolidation, this is what a real bull market feels like.
Have a good evening. I’ll see you Wednesday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
