As the Santa Claus rally dims, last year’s troubles are carried over into 2024. Persistent inflation, high interest rates, slowing economy, geopolitical risks and maritime disruptions (Red Sea, Black Seas & Panama Canal).
As earnings season unfolds, keep your eye on the relative performance of Small Cap stocks, which often act as the Market’s ‘canary-in-the-coalmine’ early warning system.
Small Caps significantly outperformed the S&P 500 following the October 2023 trough. (see first chart below)
But since the peak of the Santa Claus rally, Small Caps are rapidly fading. (second chart)
Over the coming weeks, it’s likely that earnings guidance will get revised downward from their lofty estimates. At that point, if the 2023 carryover problems persist, rose-colored valuations could become an issue and Indexes might drop precipitously to their 200 day moving average.
Be cautious.
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