A Weaker-Than-Expected CPI Report Triggers a Massive Market Rotation

Expectations for a soft CPI report were very high Thursday morning, which is precisely what we got. Interest rates fell, and the odds of an interest-rate cut in September shot up to over 90%. The market has been hoping for a rate cut for a long time, and it now looks very likely it will finally get one.

What made the action particularly interesting is that there was a very significant "sell the news" reaction in the big-cap technology names and the Magnificent Seven stocks. The Nasdaq 100 QQQ sold off around 2%, and the Mag 7 names lost over $500 billion in market cap. That was the biggest loss for the tech giants since September 2022.

The good news is that the money that flowed out of the big-cap leaders rotated into smaller and secondary stocks. The Russell 2000 IWM jumped around 3.75%, and overall market breadth was around 3 to 1 positive. New 12-month highs exceed 1,150 names.

We have had record big-cap outperformance for a very long time, but the tables were turned on Thursday as small stocks outperformed big-cap technology by the most since at least 2008.

It was a refreshing shift for traders who have been struggling with the narrow big-cap outperformance for so long, but the issue now is whether this rotational action can continue. There is still a huge gulf in performance between the big-cap technology names and everything else, and with earnings reports on the horizon, it is going to be very choppy and volatile while market players sort out valuations and deal with the shift in momentum.

We have PPI, Michigan Sentiment, and several bank earnings reports to digest on Friday, but the focus will be on rotation once again. If small-caps continue to outperform, this could turn into a real bull market rather than a fake, narrow one.

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

At the time of publication, Rev Shark had no positions in any securities mentioned.