What was most interesting about the market action Wednesday wasn't another sizable gain and new all-time highs for the Nasdaq, S&P 500, and Nasdaq 100, but the rotational action. Money moved back into big-cap technology names, and the FATMAAN stocks outperformed, primarily because of the strong positive reaction to earnings from Netflix (NFLX) . The Nasdaq and Nasdaq 100 had beautiful breakouts from a solid base. Neither index was wildly extended, as they have underperformed the small-caps recently.
In recent weeks, the leaders have been groups like financials, small caps, and special purpose acquisition companies. Those groups struggled a little today, while laggards like precious metals, FATMAAN, and big-cap technology Technology Select Sector SPDR Fund (XLK) took the lead.
There have been several times in recent months when we have seen similar rotation action, but it has not persisted for very long. Small caps have come roaring back, after a few days of underperformance.
One difference this time is that we are heading into the meat of earnings season, and that will tend to favor big-cap names that are more likely to produce sold numbers vs. speculative small caps that are often just stories.
What small caps have going for them that big caps don't is rabid traders looking for action. The advantage of big caps is that they allow big money to put big cash to work very quickly. They may not keep pace with some of the big moving small caps, but they can produce some outperformance if they stick with higher beta names like Netflix and Microsoft (MSFT) .
This action is probably the worst-case scenario for the bears. Rather than correlated selling as the frothy small caps collapse, we have some routine consolidation as money rotates into the big caps that aren't extended. This is the sort of action that is going to help stir up even more fear of missing out on big funds that can't afford to lag the senior indexes. They may not care much about the Russell 2000, but they definitely don't want to fight the S&P 500.
There probably is more rotational action coming, but that is a positive.
Have a good evening. I'll see you tomorrow.