Will Rotational Action Gain Traction?
With market inconsistencies hitting some of the most elevated levels in history, we have to ponder whether it is close to a major shift.
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For weeks now, there has been record-setting inconsistency in the market action. The Magnificent Seven names continue to prop up the Nasdaq 100 QQQ and S&P 500 SPY while the average stock continues to struggle. The S&P 500 equal weight index RSP is below its 50-day simple moving average, while the S&P 500, which is capitalization weighted, is 4% above the same moving average.
This disparity in action is nothing new. The Russell 2000 IWM is at the exact same level it hit more than two years ago in January 2022. Since then, there have been two upside moves in the index of less than 7%, but there has been no sustained upside momentum in smaller stocks for years.
The one great certainty about the stock market is that no trend lasts forever. Every cycle eventually comes to an end, and a new one emerges. With the inconsistency in the market now hitting some of the most elevated levels in history, we have to ponder whether the market is close to a major shift.
If rotational action does start to gain traction from here, it won’t happen smoothly. Market participants are not going to give up on names such as Nvidia NVDA and Apple AAPL very easily. There will be plenty of folks looking to buy pullbacks and dips, but the issue is whether there will be more interest in the values in smaller stocks that have lagged for so long.
There won’t be any clear answer to the issue about rotation this week. As I’ve discussed, huge adjustments to various indexes and ETFs are taking place this week. At the close on Friday, there will be hundreds of stocks with huge blocks of stocks traded as they are re-weighted in various ways. Friday will be the highest volume day of the year, and it will have nothing to do with fundamentals, valuations, or news flow.
Also, on Friday morning, we will have important inflation news. If inflation continues to cool, that may help trigger a more intense rotation into smaller stocks, which tend to carry more debt and are more sensitive to interest rates.
On Thursday night, the much anticipated presidential debate will take place. This is unlikely to have any immediate impact on the market, but if there are some surprises, then it could cause market reactions to develop.
This is a messy market right now with index rebalancing, severe inconsistencies, and rotational struggles. Stay patient and disciplined, and you will have opportunities.
At the time of publication, Rev Shark had no positions in any securities mentioned.
