Published July 12, 2024
Thursday’s trading in the stock market possibly marked the beginning of a new phase in this bullish cycle. After badly trailing all market indexes for a very long time, the small-cap focused Russell 2000 index dramatically outperformed the rest of the market. However, that outperformance by the small-caps was merely a reflection of a massive sector rotation. The Magnificent Seven stocks that have been ruling this market for months were sold off with money pouring into other areas of the market.
Here’s a heatmap of Thursday’s moves:
You see the largest stocks in the market – all tech/consumer-related being awash in red while most of the rest of the market shows green. That is rotation!
Prior to Thursday’s trade, the small-cap index had been so badly outperformed by the Nasdaq 100 (QQQ) that the ratio of the two had fallen to its lowest level in almost 25 years!
As Mike Zaccardi wrote about his chart above:
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- The market was extremely bifurcated between Small Caps and Large Caps today.
- The Russell 2000 ($IWM) had its best day since October, rising +3.57% , while the Nasdaq 100 ($QQQ) dropped -2.24% from a record high after rising for seven consecutive days.
- Mike points out that $IWM outperformed $QQQ by nearly +6% today, marking the widest spread in over two decades. This ratio reached an all-time low yesterday, but today’s historic move suggests a potential reversal.
The Takeaway: The Russell 2000 ($IWM) outperformed the Nasdaq ($QQQ) by the widest margin since 2001 today. This could start a healthy rotation into Small Caps as the Nasdaq digests its recent gains.
Sparking that rotation were words by Fed Chair Powell inching closer to reducing interest rates and an inflation report showing a notable reduction. The market now expects the first rate cut could come in September. Small-cap stocks have been prisoners of higher interest rates as the small companies have fewer financing options available and would have to roll over existing debt at likely much higher interest rates. The increased cost would further impair their already-weak balance sheets. Lower interest rates would be a lifeline for some of these companies and a significant profit boost for others. Beyond small-caps, homebuilder stocks rose sharply as interest rates tumbled Thursday. Lower interest rates could well reverse a very weak home selling market and spark a surge in home building activity. It’s been assumed that many potential home buyers and sellers are waiting on lower interest rates to make any moves.
If this rotation continues, it will be a big boost to the stock market rally, though perhaps not seen as much among the market indexes that have become beholden to the massive size of the Mag 7 stocks.
Market Update
Stocks largely ran in place Monday and Tuesday with investors looking ahead to the beginning of earnings reports at week’s end and fresh inflation reports mid-week. Both days saw broad market indexes ticking slightly upward to new record highs. Banking stocks found gains Tuesday as buyers stepped in ahead of earnings reports due Friday. Fed Chair Powell’s words fueled a +1% move Wednesday. The central bank head is beginning to lean a little more toward the start of interest rate reductions as employment data has become a less inflationary. Thursday brought the monthly report on consumer prices. The report showed inflation ticking down with price gains at their slowest ramp in three-and-a-half years. Investors reacted to the report with a furious shift in investments, dumping the market-leading “safety” stocks of the Mag 7 companies and buying up cyclical stocks. Interest rates fell sharply. Small-cap stocks, which had ZERO gain for the year coming into Thursday’s session vaulted over +3% while the Nasdaq 100 (QQQ) slid more than -2%. Investors stepped in Friday to buy the dip in Mag 7 shares while also continuing to move money into other market areas. Stocks rose +0.6% though they were higher by twice that amount for most of the day. Large banks were mixed on their earnings. Interest rates continued to slide as investors now believe the Fed will begin cutting interest rates in the coming quarter.
Lots of fireworks late in the week, but the S&P 500 closed with another weekly gain, higher by +0.96% for the week. The Nasdaq 100 (QQQ) fell back -0.27% after Thursday’s selloff in Mag 7. Smallcaps broke out their choppy sideways pattern with a +6.11% surge.
Warm wishes and until next week.