Momentum Monday - Will Small Caps Join The Party?

Bull markets correct through sector rotation. Last week, we saw proof of that. While megacaps consolidated near their all-time highs, small caps erupted. The catalyst – smaller than expected consumer inflation, which is likely to lead to a rate cut later in the year. The premise is that many small caps need to refinance, and any decline in interest rates could have a big impact on their bottom line. This is why biotech and homebuilders were among the big movers last week.

Later in the week, the so-called producers’ inflation came above estimates, which led to a pullback in small caps. The index is still in an uptrend, and as long as rates continue to decline, it should keep making higher highs and higher lows.

In the meantime, crypto lives in its own world and has its own catalysts. 401 (k) accounts are now allowed to invest in crypto and private companies. BTC, ETH, and SOL made new multi-year highs before they pulled back later in the week. I wouldn’t chase them here. I would rather wait for them to set up again near their rising 20 or 50dma.

August and September of the second year after the US presidential election are typically red months for the stock market. We have not seen any evidence of that yet. There are select industries like software and cybersecurity that had sizable pullbacks, but the indexes have remained unscathed for the most part due to sector rotation. The government seems bent on the idea of inflating the debt via currency depreciation, so any sizable dip in the stock market is likely to be welcomed as a buying opportunity.