On Monday, speculative small-cap stocks delivered some of their best price action since the middle of February. There was no obvious catalyst for the move, but money rotated back into the smaller stocks that have been lagging for months.
Biotechnology, SPACs, gambling, cannabis, and other areas of the market had fallen enough to be in a bear market while the senior indices were hitting new all-time highs. On Monday, this rotational action finally reversed, and individual stock-pickers celebrated.
The issue now is whether this action will continue. Can the small-caps build on this action and gain further momentum, or will they roll over again in favor of value stocks and big-cap driven indices?
Many of these small-cap names have had significant pullbacks and have found some good support, but it would be a mistake to assume they are going to regain the same sort of momentum they saw in January and February when there was a speculative frenzy driven in part by social media. The social media speculation has cooled substantially and is not showing signs that it will be invigorated in the same way it was previously.
Bitcoin is following through on a sharp reversal to the upside, and that is helping sentiment for more aggressive trades, but there is a slew of earnings reports hitting.
Tesla TSLA issued a solid report, but as usual, there are concerns about cash flow, EV credits, and other issues. The stock is seeing a little "sell the news" action Tuesday morning but remains technically healthy over its 50-day simple moving average.
Now that the severe pressure on small-caps has finally lifted, I will be focused on more aggressive buying. The key is that recent lows hold. If they are retested, it is going to hurt sentiment and trigger some quick defensive selling. Currently, the stock-picking environment is looking much better, but there have already been some substantial bounces, and there may need to be some consolidation before they can be built on further.
Indices are set for a mild open despite the better trading action.