There was some very interesting price volume action this week in the stock market. Inflation data came in hotter than “expected”. That didn’t surprise me, but it did spook the market for a day. What I find encouraging is that stocks are getting comfortable with the likelihood that interest rates will stay higher for longer. In other words, the market is adjusting to the end of the era of free money.
Another encouraging item is that the RUSSELL2000 Small Cap index is stabilizing above its long term moving average (~ four year moving average). That’s no small feat because it’s consistently vacillated around that dreaded level for nearly two years.
I’m not recommending wide scale purchase of the RUSSELL2000 because about 38% of the index is UNPROFITABLE. However, I do think there are interesting value (defensive) opportunities outside of the Magnificent Six (remember Tesla has fallen out of grace, and Apple & Google might be on their way out too).
What I’m watching closely is the relationship between long term interest rates and Small Cap stocks. Note the below chart. The RUSSELL2000 collapsed when the 10 Year Treasury peaked at 5%; however, it’s “comfortable” (hovering around 2000) with interest rates above 4%. I think this is critical because I foresee long term inflation (regardless of how the government calculates it) running above the 10 year average.
If Small Cap stocks can remain above their 50 day moving average (dma) and 1000 dma, (both converging around 2000) then I think some under appreciated areas of the market might be investable.
PS- I don’t know if I’ll get around to a blog post, but I’ll definitely be doing a podcast episode about the “corporate earnings big lie”…stay tuned.
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