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The Nasdaq 100 and the small-cap index Russell 2000 started the year strong. Then, in mid-February, entered into consolidation building a long multi-month base. While QQQ and IWM were in a range and many momentum stocks from 2020 experienced 50%+ drawdowns, the so-called old-economy stocks – financials, industrials, transportation, basic materials, energy, outperformed significantly – the market tried to manage quickly rising inflation expectations. In the past week or so, the roles began to reverse. It seems financial markets have woken up to the possibility that they might have over-discounted the threat of sizable longer-term inflation and are now backpedalling to correct the excesses. This is nothing new. The markets are often too fast to react to new dangers and opportunities and therefore, swing too far to the upside or the downside. This is what makes trading and investing so interesting, challenging, and exciting at the same time.
We might have entered a new narrative that is positive for the so-called new economy stocks – software, semis, solar, biotech, medical devices, etc. Growth stocks are setting up and breaking out again, the general price action is bullish and the most appropriate action, for the time being, is to remain long.
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