Will a Surge in Big-Cap Tech Undermine Small Stock Speculation?
Here's my game plan as views about the economy under Trump start to shift.
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Big-cap technology stocks enjoyed their best two-day move in nearly a month as the Magnificent Seven MAGS jumped 3.3% on Friday and Monday. During the same period, the Russell 2000 IWM has only been able to improve by 0.3% and the DJIA by 0.2%. This action is a reversal of the rotation that has favored secondary stocks since early November.
The recent large moves in the indexes and many individual stocks were primarily fueled by election optimism and the embrace of a Goldilocks narrative in which increased inflationary pressures were more than offset by hopes of robust economic growth.
The post-election rally has been running for nearly a month now, and the market is starting to show signs of questioning some of the most optimistic views. The rotational action back into the "safety" of the Magnificent Seven over the last two days is one sign that views about the economy under Trump are starting to shift.
Another issue that is beginning to impact the market to a greater degree is the upcoming Fed interest rate decision. The market is currently baking in about a 70% chance of a quarter-point cut, but some Fed members are openly questioning whether this is a good idea. Fed Chair Jerome Powell is scheduled to speak publically on Wednesday, and there are very important November jobs numbers coming up on Friday. These are the last big events before the Fed meeting and will influence the odds of a rate cut.
Both the dollar and bonds have recently seen increased volatility, which will impact what equities do next. Interest rates have pulled back as some of the concerns about tariffs have eased, but it is a very fluid situation, and any indication of a rebound in inflation could hit bonds.
The rotational action in equities is making stock picking more difficult as smaller stocks with the best momentum are starting to see profit-taking. Bitcoin and related names have cooled off, which has contributed to less speculative action.
My game plan here is to watch to see if this rotational action can continue to gain traction. If it does, then there will be deeper pullbacks in small stocks that have yet to find support levels.
I believe it is likely that we will see at least one more speculative surge before the end of the year, but it may take some economic news to trigger renewed interest. It has been a good run, and I want to protect gains, but it is premature to anticipate a major correction.
We have a quiet start on Tuesday morning.
At the time of publication, Rev Shark had no positions in any securities mentioned.
