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MarketSmith powers the charts in this video.

As expected, small caps finally joined the rally attempt. They have been super-volatile, to put it mildly. It’s in their nature. Two weeks ago IWM had a big rally to its 50dma and then pulled back in the following few days. Last week, IWM had a strong rally on huge volume to its 200dma and then pulled back a little on lighter volume. After all was said and done, IWM still made a few higher lows and higher highs. It is starting to work on an uptrend, which will be somewhat confirmed if it starts to rise above its 200dma for more than a day or two. If this happens, all the worries about market breadth will slowly disappear. Market participants’ attention will shift from the mega-caps to the more speculative mid, small, and micro-caps which tend to move much faster, in both directions. 

In the meantime, earnings breakouts from various sectors continue to follow through – PLTR, DKNG, SHOP, DIS, etc. The mega-caps are acting constructively. AMZN, META, MSFT, and NVDA are hovering near their 52-week highs. AMD is working on the right side of a new base. TSLA is the only one still struggling below its declining 50-day moving average but even they are making higher lows and higher highs in the past couple of weeks. It’s interesting that lately TSLA is much better correlated with the small-cap index Russell 2k than with the Nasdaq 100.

The next trading week is shortened due to Thanksgiving. I hope you have a wonderful time with your family if you are celebrating. One big earnings event to be aware of is on Tuesday after the market close – the undisputed momentum leader of this year reports – NVDA. They have the potential to rattle the speculative juices of the market.

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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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Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.

MarketSmith powers the charts in this video.

Last week, we talked about the potential for the FOMC meeting to become pivotal for a market bounce. This is exactly what happened. Sentiment changed after the FOMC meeting. Powell finally said that the current risks are balanced between inflation and a recession. This means that the Fed is not likely to touch interest rates in the foreseeable future unless something breaks. This was enough for the stock market to rip higher. In the meantime, interest rates and the U.S. Dollar pulled back which is usually a green light for stocks.

A few days into this bounce, one can clearly see that the worst-hit groups in the past three months outperformed by a significant margin. Typically junk outperforms either during bear market rallies or after a deep and long market correction. It can easily be the former, but we are going to give the benefit of the doubt to this rally until we see some evidence of heavy selling. 

The silver lining of last week is that there were several back-to-back high-volume accumulation days in the small-cap index – something we haven’t seen since June of this year when the stock market started its big summer rally. Another potential tailwind for the current bounce is the overall reluctance to believe in it after so many failed follow-through days in the past few months. The majority of market participants are underinvested, short, or want to get short. The first group is praying for a dip so it can enter with a tighter stop. This is not a bad approach, the problem is that when it finally happens, many will be too afraid to pull the trigger. 

Keep in mind that the indexes haven’t made a higher high yet. They are up several days in a row, so it’s only normal if there’s some form of consolidation sometime soon. The new leaders will stand out during that consolidation. 

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I published a new trading book recently (2023). Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.