Will Earnings Season Trigger a Stronger Rotation Into Smaller Stocks?
The biggest shift on Friday was a surge in speculative trading. Here's what could happen next.
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After very strong rotational action into small-cap stocks on Friday, the primary market issue is whether earnings season will provide a further positive catalyst for the Russell 2000. Earnings from major banks such as JPMorgan Chase JPM helped to propel the financial sector and many smaller banks, which are a major component of the Russell 2000.
The most important shift on Friday was a surge in speculative trading. For the past month or so, the major indexes have stayed strong with good support, but momentum has been lacking. The Magnificent Seven names (MAGS) are no longer the primary leaders and are still well under the highs that they hit in mid-July. Breadth hasn’t been particularly strong, and small speculative traders have been missing out on action.
The biggest positive the market has had going for it is that the bulls have embraced a very positive economic narrative in which inflation is well controlled, and there is growing hope that there may not be any significant economic slowing.
The bond market has not been as optimistic as the stock market, however. Interest rates have been rising steadily, and the 20+ Year Treasury Bond ETF TLT is trading under its simple 200-day moving average. The yield over the 10-year period is sticking to the 4% level.
The disparity between bonds and stocks won’t continue forever. At some point, it should become clear that one or the other is wrong, and there will be a significant market move. Some of the economic news last week was a bit hotter than expected but that was offset by some slowing in jobs.
While earnings will be the primary focus this week, the big technology names are still a week away from reporting. The market was very celebratory over banks on Friday, and we’ll see if that theme continues as names such as Goldman Sachs GS and Johnson & Johnson JNJ report on Tuesday morning.
The small-cap action on Friday was very encouraging, but several times this year, surges in the Russell 2000 have fizzled out quickly, and stock buyers quickly turned into sellers. Although small-cap earnings season is still about three weeks away, there are better charts developing in the group.
I’ll be looking for more pockets of speculative action on Monday but would not be surprised if the action turns choppier as we wait for earnings from big-cap technology.
At the time of publication, Rev Shark was long JNJ.
