On Wednesday, the Nasdaq and Nasdaq 100 broke out to new all-time highs with gains of around 2%. The move was primarily driven by a renewed interest in the FATMAAN stocks that have recently been underperforming. Strong earnings results from Netflix (NFLX) helped to trigger the rotation.
Small-cap stocks ( (IWM) ETF) have recently been market leaders as aggressive individual traders have been focusing on lower-priced stock picks. There is quite an appetite for the speculative names and no indication that liquidity is tightening, but some of the big money decided to move back into the FATMAAN names, which caused mixed action in many of the high-flyers.
There have been several instances of similar rotation in recent months. It has persisted for a few days, and then the small-caps, financials, and a few other groups have come roaring back. We will see if the rotation is more sustained this time.
This sort of rotational action is very bullish. It indicates that market players still want to put capital to work, and they are looking around for better entry points rather than chasing some of the wildly extended smaller stocks. There is still plenty of speculative action in groups such as SPACs, electric vehicle names, small biotechnology, solar energy, etc., but it is more selective and more focused.
Much of the bearish narrative of late has been focused on the supposed illogical individual traders who are aggressively trading small-caps. The strong rotation into big caps and the breakout in the Nasdaq indicates that the institutional and big money is afraid of missing out. There has been substantial underperformance by large funds that don't focus on small-caps, and they are looking to play catch-up by buying old favorites such as Facebook (FB) , Amazon (AMZN) , and Apple (AAPL) .
We have earnings tonight from Intel (INTC) and IBM (IBM) , which will attract some attention and give us a sense of the market mood, but both these names have been laggards for a long time and don't have the power they once did.
The market is now enjoying a honeymoon period with the new Biden Administration. Optimism is high, and the negative financial impact of various policies is not yet an issue. That will likely start to shift quite soon as the actual policy is debated, but market momentum is currently strong enough to overcome these issues.
We have a mild start to the day, which should favor a focus on stock-picking.