After lagging behind the broader market, small-caps show strength

Commenting on today’s broader market trading Gorilla Trades strategist Ken Berman said:

broader market

Tumisu / Pixabay

While large-cap stocks pulled back today, with especially the techs sector being under pressure, the majority of stocks remained bullish, and small-caps continued to march higher.  The Nasdaq clearly lagged the broader market today, due to the weaker-than-expected earnings of Google parent Alphabet (GOOG), the Russell 2000 hit another six-week high, and more and more stocks are approaching uncharted territory.

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The major indices broke their two-day winning streak today, finishing slightly lower ahead of tomorrow’s highly-anticipated Fed decision. The Dow was down 20, or 0.1%, to 27,071, the Nasdaq lost 49, or 0.6%, to 8,277, while the S&P 500 fell by 3, or 0.1%, to 3,037. Advancing issues outnumbered decliners by an almost 3-to-2 ratio on the NYSE, where volume was in line with the average.

We had another day of divergences between the key sectors, with the earnings reports making a difference again. The healthcare sector was boosted by Merck (MRK) and Pfizer (PFE), while ConocoPhillips's (COP) positive report helped materials in holding up in the face of the pullback in the price of oil and gold. Industrials also shined, while financials and utilities trod water, with consumer goods and services taking a hit due to, in part, the weaker-than-expected CB consumer confidence number.

All eyes on the Fed

Besides a major surprise from the Fed, the report of Apple (AAPL) could also cause a meaningful rise in broader market volatility tomorrow in after-hours trading. Apple’s Asian numbers will be closely watched, but the stock’s recent lofty gains mean that investors are confident regarding the firm’s ongoing shift towards services. Facebook’s (FB) advertising revenues will also be under scrutiny in the wake of Google’s lower-than-expected figures, while General Electric (GE) and Starbucks (SBUX) will also report tomorrow, marking one of the busiest sessions of the earnings season.

While the Fed’s announcements will likely steal the show tomorrow, the pre-market session could already see fireworks across asset classes due to the key economic releases. The first reading of the third-quarter GDP print and the ADP payrolls number both have the potential to cause wild swings, and both indicators are expected to come in below their previous readings. GDP growth is forecast to slow down to 1.6% compared to last quarter’s revised 2.0% reading, while payrolls are expected to increase by 125,000.

Fed days are usually quiet ahead of the 2 pm announcements, but with the uncertainty regarding the expected rate cut being higher than in the last two cases, the economic numbers could have a bigger impact tomorrow mornings. The recent de-escalation of the trade war, the bullish corporate earnings, and the lower risk of a no-deal Brexit all make a global recession less likely, so it’s no surprises that Treasury yields have been rising in recent weeks. Despite that, most analysts still think that the Fed will cut its benchmark rate for a third time in a row, since economic numbers continue to be soft.

Broader market technicals

Even though the major indices continue to experience significant day-to-day volatility, due to the earnings season, the short- and long-term advancing trends remain intact. The benchmarks are still well above their rising 200-day moving averages of 7,841 for the Nasdaq, 2,881 for the S&P 500, and 26,167 for the Dow. The indices are also above their rising 50-day moving averages of 2,963 for the S&P 500, 8,043 for the Nasdaq, and 26,665 for the Dow, although the industrial average is still relatively weak compared to its peers.

After lagging behind the broader market for several months, small-caps have finally been showing relative strength in recent weeks. Although last week, the Russell 2000 spiked back below its 200-day moving average, today, the benchmark got very close to its September and July highs, making a technical breakout likely in the coming week. The index is now clearly above both its short- and long-term moving averages, and in light of its strong showing today, it could lead the way higher in the second half of the week. Stay tuned!



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver