Momentum Monday – Large Caps Continue to Dominate

MarketSmith powers the charts in this video.

The lock-out rally continued with full force and didn’t involve only the so-called Magnificent 7 stocks – NVDA, AAPL, AMZN, GOOGL, MSFT, META, TSLA. Anything tech-related was on fire – semiconductors, software, communication stocks. The dips were shallow and they were bought again. It only makes sense for large caps to lead right now. If most institutions are underinvested, then the fastest way to get into the market is via liquid large caps. 

Small caps continue to be the much weaker part of the market. Russell 2000 ETF, IWM lost 3% for the week. It found resistance near its declining 50dma. Can the overall market rally continue without small caps? Anything is possible. I don’t think it’s very likely. If this rally has more room to run, we will eventually see some rotation into small caps. We saw it happen last summer when large caps led the way breaking out in mid-May. Then small caps joined a couple of weeks later in early June. If the same scenario plays out again, the best is yet to come on the long side. 

There’s always a chance that small caps continue lower and the current stock rally will fizzle. A lot will depend on interest rates. Any spike in yields will be a big headwind. As of now, the trend for QQQ and SPY is up, the bulls are in control. It’ll take more than one distribution day to shake people out. The pain trade is still higher because almost no one believes in the sustainability of this rally. I don’t believe in it either but I am not fighting it. I’ve made sure that I am participating because the market doesn’t care about our feelings and expectations.

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