This Is What a Real Bull Market Looks Like
The rotation is proving not to be a one-hit wonder. But here's what was most impressive about Friday.
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A softer-than-expected CPI report on Thursday increased the likelihood of two Fed rate cuts later this year and triggered a massive rotational move out of big-cap technology names and into smaller and secondary stocks.
The outperformance of the Russell 2000 IWM over the Nasdaq 100 QQQ on Thursday was record-breaking and primarily a product of the belief that lower interest rates will benefit smaller stocks more than large-cap names because they have more debt, less cash, and are more impacted by inflationary pressures.
The good news is that this rotation was not just a one-day affair. The Russell 2000 had another solid day on Friday, and the S&P 500 completely recouped Thursday’s losses. The Nasdaq 100 bounced as well but wasn’t able to fully cover.
Breadth on Friday was exceptional with around 7,400 gainers to 1,900, but what was most impressive was that there were over 1,450 stocks hitting new 12-month highs. That is what a real bull market looks like.
We have had a very narrow "fake" bull market for a long time, with just a handful of names driving the indexes. The vast majority of stocks have not been in a bull market at all, although the business media has been seemingly oblivious to the underlying market action. On Thursday, they acted like the rotational action was bad news since their favorite indexes declined, despite the majority of stocks moving higher.
The reality is that this sort of rotation is exactly what is needed for a real bull market with broad participation. There are so many stocks that have lagged for years and are good values, and now they can attract value buyers who had no choice but to buy expensive big-caps because they had the best relative strength.
Next week, earning seasons picks up, and that may turn out to be a catalyst for even more rotational action. If nothing else, it is refreshing to see the market finally move beyond the pattern of index strength on very poor breadth.
Have a great weekend. I’ll see you on Monday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
