Danger Lurks in the Market This Week
Fresh new highs for the S&P 500 and Nasdaq are forging the way but investors aren't being rational about small-cap stocks.
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It is hard to imagine the stock-defying logic for too long but, then again, "the markets can remain irrational much longer than you can remains solvent," as John Maynard Keynes said.
We are talking here about the divergence between large- and small-cap stocks, specifically. We are at the midway point of June and, so far, the Nasdaq and S&P 500 names have far outpaced the Russell 2000 small caps. That is rather unusual, especially during a bull run. But investors are specific and peculiar at times, preferring to err on the side of safety when it is evident.
But is the market safe? Big tech names have been driving the action, we all know that cannot last forever. For now, investing in those names has been beneficial. Interest rates have started to slide on the long end of the curve, and that is often seen as a benefit to the small caps. However, that combination (low rates and money flows to small caps) has not been working. Perhaps the market sees more economic slowing ahead, which might hinder growth in small-cap names.
Goldman Sachs raised its year end target to 5,500 with a possibility to 6,300.
This is a short trading week, Wednesday is a holiday in celebration of Juneteenth. But leading up to that day will be a slew of Fed speakers, at least six over the next couple of days. Could they say more than what was stated at last week's meeting and press conference? Possibly, but most likely not a stance on changing monetary policy.
Friday is a big options expiration day, it is called "triple witching" (options, index option and options on futures all expire on the same day). We also have June S&P futures rolling out to September, which often confuses investors due to the differential between the futures and the S&P 500 cash index (it is quite large).
Lennar LEN reports on Monday while KB Home KBH delivers earnings on Tuesday evening. We'll get a good read on housing data this week along with these two important reports.
The S&P 500 is not entirely overbought here and could see a bit of upside but danger lurks with a very low volatility index (VIX). Options are cheap, so put protection can be bought to protect against a rise in short-term volatility.
At the time of publication, Lang had no positions in any securities mentioned
