Wall Street Realizes That Valuations Matter

Semiconductors struggled to bounce back from the pounding they suffered on Tuesday, but the most notable action on Wednesday was the continued rotation out of big-cap technology stocks and into the Russell 2000 ETF IWM. Small-caps gained an additional 1.6%, while the Nasdaq 100 QQQ finished flat for the day. 

When small-cap stocks are strong, they usually produce good breadth, which was the case with over 7,300 gainers and 2,100 decliners. Eight hundred fifty names hit new 12-month highs.

Apple AAPL, Microsoft MSFT, and Meta META acted poorly, while Nvidia NVDA rebounded and financials hit new highs. Airlines were a leading group due to good earnings.

The relative strength of small-caps isn’t something that we have seen too often in the past year. There have been a few runs by secondary stocks, but they haven’t lasted long as investors can’t seem to resist the appeal of the big-cap favorites.

This time, the big-cap tech names have been lagging for a while, and the semiconductors have raised concerns about expectations and valuations. Valuations haven’t mattered much, but now that they do, the market seems to have figured out that there are many good smaller stocks that have been ignored for a long time.

We will see if this can continue, but the Russell 2000 is already bumping into overhead resistance at the highs it hit at the end of July. There was a very sharp selloff at the prior highs, and it has taken a long time to recover.

Earnings season becomes more interesting on Thursday with Netflix NFLX reporting after the close. Weekly unemployment claims on Thursday mornings will also be of interest.

It has been a good run for stock pickers, but small-caps tend to become extended very fast, and that generally produces higher levels of volatility.

Have a good evening. I’ll see you Thursday.

At the time of publication, Rev Shark was long NVDA.