Following positive earnings from Netflix (NFLX) and optimism about a peaceful transition of power in Washington, the market is prepared to build on yesterday's gains.
The strong earnings and positive response in Netflix bodes well for earnings season. Big cap technology stocks and the FATMAAN names have been lagging recently, but Netflix may help restore some confidence in the stocks that were viewed as 'safe-havens' for much of 2020. There has been a significant rotation into individual stock picking, small-caps, and various hot sectors like SPACs and electric vehicles in recent months. The FATMAAN names lost their momentum, but a considerable fanbase would love to put some capital to work in 'safer' big caps.
For a very long time, the most notable characteristic of this market was very narrow leadership. There were numerous statistics about how the great bulk of gains in the senior indices was primarily due to seven or eight big-cap technology names.
That started changing this summer as money rotated into small-caps, and stock picking attracted hot retail money. Parking money in the FATMAAN names wasn't enough action for aggressive retail traders. They poured into low-priced stocks and aggressively traded pockets of momentum, and they are still at it.
While many market pundits are trying to predict a market top, due in part to this frothy small-cap action, they seem to underestimate the momentum that is out there. These traders that have been doing so well recently are not going to just suddenly disappear. They will have to suffer some losses that hurt and will not be discouraged easily. It is unrealistic to expect a collapse when there is still a high level of liquidity combined with positive sentiment.
Yes, there will come a day when the market will undergo an ugly correction, but it is impossible to know when that may happen. Some folks decide to sit on the sidelines out of an abundance of caution, but they are racking up huge losses in the form of opportunity costs. It takes some work, but this market offers plenty of opportunities for aggressive traders that manage positions carefully.
With the good earnings from Netflix, market participants are likely to be optimistic about other significant technology reports starting to hit next week. That coupled with strong small-cap and stock-picking momentum is good reason to maintain a bullish posture. Stay focused on price action and keep looking for strong technical action.