Published March 1, 2024
For much of the past month, many analysts warned of a coming correction in stocks. Their forecast was based on February, especially the second half of the month, being a historically weak period. That didn’t come to pass. Strong earnings from the market’s biggest companies supported their elevated prices and kept the rally fires burning.
As we turn into March, there are signs of investor enthusiasm expanding rather than shrinking. One sort of niche aspect of this increased “risk-on” mentality comes in the form of cryptocurrency investing. Articles abound gushing over the extraordinary run of bitcoin this past month. The chart below shows just one example of this extraordinary run.
Further, AI mania has been on display again this quarter as almost every company connected to this area has posted bullish outlooks. Just today we have Dell shooting higher on their earnings as demand for their AI servers booms.
Beyond these market hot spots, we are looking to mid, small, and micro caps to fully join the rally. That will kick things into a higher, and perhaps more sustainable, gear. That would signal that Investors have become bullish enough to overlook the higher risk these areas carry, a risk due to the negative impact of higher interest rates.
Midcaps have already broken out to new highs:
Smallcaps have a ways to go for new highs. But breaking above the red resistance line will be a strong positive indicator.
Even more so for microcaps, the companies most impacted by higher interest rates and shifting financing options. The group has begun moving upward, but investors still aren’t embracing them.
In short, there are some areas of the stock market that are absolutely on fire. There are other areas that still struggle to overcome the impact of higher interest rates. The indexes of smaller companies will join the upswing if investors become truly bullish. The broader the sector and index participation in the rally, the more sustainable it is.
Market Update
Coming back from a Monday holiday, stocks took a small step backwards Tuesday. Shares of Nvidia fell -4% as nervous investors sold ahead of the company’s earnings report later in the week. The stock is already up some +40% in 2024 after a blistering +300% rise in 2023. The company shocked analysts and investors in spring 2023 by announcing extraordinary numbers of orders coming in for AI-related semiconductors. The announcement sparked a massive rally across anything remotely related to AI and propelled tech indexes to new highs. Investors wonder how long the gravy train will last. Tuesday found investors selling leading market indexes lower by -0.6%. Another -3% drop in Nvidia shares Wednesday, though traders focused mainly on minutes from the most recent Federal Reserve meeting. Those minutes continued the theme that the Fed is cautious about cutting rates too soon, thus confirming a tick upward in rates as the notion of multiple 2024 rate cuts gets pushed out in time. Shares of cybersecurity darling Palo Alto Networks plunged -28% after cutting its outlook – a shock after the other cybersecurity companies reported strength. Also Wednesday, it was announced that Amazon will replace Walgreens Boots Alliance in the Dow Jones Industrial Average. But the fireworks came after the market close when Nvidia destroyed earnings estimates yet again. The company announced a tripling of sales over the year prior period and continued to suggest that AI-related spending is still early in the cycle. After hours, the company’s shares recovered the ground lost earlier in the week. But that was just a small taste as traders poured money into the company and anything related to chips or AI in Thursday’s session. Nvidia’s shares tacked on another +10% gain during the day while stocks rallied strongly worldwide leaving many global indexes at new highs. The S&P 500 added +2% on the day. After such a run Thursday, ebullient traders saw markets pause Friday as indexes were little changed.
Nvidia did it again, reversing a market downshift early in the week to lift indexes to new highs and tack on yet another winning week. The S&P 500 (SPY) rose +1.67% while the Nasdaq 100 (QQQ) added +1.44%. Of some interest, the Nasdaq 100 (QQQ) has only been higher once in the past four trading sessions. As noted last week, investors have generally been pulling back on the ultra-hot tech trade throughout February. The Nvidia earnings caused a one-day pause in that shift. Small cap stocks (IWM) reflect better the more cautious areas of the market and the impact of freshly-rising interest rates. The index was up only +0.23% this week.
Warm wishes and until next week.
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