This Small-Cap Rotation Is Unconvincing

 | Jan 10, 2017 | 10:42 AM EST
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One of the big challenges for traders since the start of the post-election rally is a very high level of rotation. The market's gone through periods when leadership has shifted between financials, oil, biotechnology, steel and FANG names.

Today we have another rotation taking place. Small-cap names are leading after underperforming for about a week. That is driving breadth, which is running positive for the first time in four days at 3,800 gainers to 2,250 decliners.

Steel, precious metals and junk biotechnology are the primary leaders. Trading is aggressive in names such as Diffusion Pharmaceuticals (DFFN) , GenVec (GNVC) and EnteroMedics (ETRM) but they are reversing hard as I write.

There has recently been some very hot speculative action in a few areas, which contrarians might argue is a sign of toppy action. While I don't find that argument very compelling the narrowness of it is a concern. Traders are really pressing to find some action and in some cases are chasing things to a ridiculous extent. That can work but you better ready to move quickly. Just take a look at ETRM, which has ranged from around $25 to $16.50 this morning.

On my radar this morning is Shopify (SHOP) , which is gaining momentum after a deal with Amazon (AMZN) ; Oclaro (OCLR) , which has some positive comments from Needham; GenMark Diagnostics (GNMK) , which issued guidance; and McEwen Mining (MUX) , my favorite miner.

Overall the index action is not poor and if the FANG names roll over further it is going to be a problem. I'm not expecting small-caps to hold up very well. They were oversold and needed a bounce but it is not convincing action at this point.

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