Many aggressive traders were hopeful that major earnings reports on Tuesday night would help to trigger a rebound in the long-suffering growth and small-cap names. The logic was that a "sell the news" reaction by some of the FATMAAN names would trigger rotational action out of indexes and big caps and into the secondary names.
It didn't quite happen that way, but the Russell 2000 -- and the fund (IWM) -- had a solid day with a gain of 1.5%, and breadth was around three to one positive. Pockets of momentum expanded quite well, and there were dozens of names on my screens with gains of more than 10%.
The big issue now is whether we can build on this action. Small-cap traders are understandably skittish after months of poor performance in their favored names, so they are likely to take the opportunity to reduce some into strength, but if you are looking for good chart setups and solid fundamentals, then it is the smaller stocks that offer the best potential.
We ended the day with the S&P 500 close to flat but breadth very strong at three to one positive. This was a reversal of some of the recent action when the indexes moved higher on negative breadth, but the gulf between the indexes and the small stocks is still extremely wide, and there is likely to be some choppy action as we move forward with earnings news and start to deal with the two-tiered nature of the recent market action.
We had similar actions last week on Monday and Tuesday, and it reversed sharply at the end of the week. Traders are not going to be too trusting, but the longer this sort of action lasts then the greater the fear of missing out on a significant bottom.
Have a good evening. I'll see you tomorrow.