Is the Small-Cap Surge ‘Late Stage Action’ or Just Normal Rotation?
“Gambling” or Just Rotation? ‘Late Stage Action’ or Just Normal Rotation Small Stocks Are Surging While AI Names Slip
The market surprised many investors on Thursday when an aggressive selloff in the semiconductor sector triggered strong rotational action into the broader market. The DJIA and Russell 2000 ($IWM) jumped more than 1.5% while the Nasdaq 100 ($QQQ) lost 0.5%.
That is unusual action, but it is largely a function of both a high level of speculation and concerns that AI-related stocks are expensive and technically extended. Investors are still bullish, but they are trying to reduce risk by moving into secondary stocks while groups like chips look frothy and vulnerable.
The WSJ Take on Small Stocks
The Wall Street Journal has a report this morning, “Small Stocks Are Trouncing Market Giants—And That’s Not a Good Sign.” The gist of the article is that the “gambling” in “penny” stocks is highly emotional and undisciplined and is typical late-stage action. The article also notes that higher oil prices may have been an additional catalyst for a move into smaller stocks that are not as leveraged to energy prices.
Articles of this sort always appear when there is outperformance in smaller stocks, but they do a poor job of timing when their arguments may have an impact. They also ignore a huge portion of the market that is somewhere between mega-caps and penny stocks. This market is ripe for new trends and sectors to continue to emerge and evolve. We are seeing it particularly in the AI sector where there is movement from infrastructure to business applications.
The most important issue here is to be aware of rotation. We’ll see if we build on the rotation that hit on Thursday or whether it was just a one-off event that will quickly lose steam.
The Jobs Report Is the Test
We have the May Jobs Report Friday morning which may shift attention back to economic issues. The response to that will be telling as it will give us a sense of whether selling triggers more rotation or whether it weighs on the entire market.
Strategy
My strategy remains the same. I’m intensely focused on stock picking, keeping stops tight, and have raised cash levels. I’m focused on opportunities rather than being bullish or bearish.
At the time of publication, Rev Shark had no positions in any securities mentioned.
