Inflation continues to heat up, but not enough to crimp market performance – especially with large-cap stocks.
“The inflation report on Friday was the highest in nearly 40 years, but it was not as hot as many had feared,” said TheStreet’s James “Rev Shark” Deporre in Real Money. “The news helped to push the indexes higher, but, once again, it was deceptive action as small-caps and growth stocks lagged, and breadth was dead even.”
“Buybacks of stocks appear to be helping some of the mega-caps, and that has created an overall impression of strength that is not helping many growth stocks and smaller names,” he noted.
Growth stocks and small-caps tend to be more sensitive to inflation concerns which is part of the problem. “Many of them are trading based on earnings that won't develop for years, and when interest rates are higher, that impacts the discounted present value of those stocks more,” Rev Shark said.
For months, Deporre has been hammering away on the “two-tiered nature “of the stock market.
“There is a giant disparity between the indices and some big-caps on the one hand and the majority of other stocks - especially growth and small-caps,” he said. “There are numerous statistics that demonstrate this, but one of the simplest is that about 60% of stocks are trading under their 200-day simple moving average.”
On the surface, many of the smaller stocks are good values, but so many have acted poorly that they are likely to see pressure from tax selling.
“The inflation worries are hurting the names, and the lack of relative strength is a problem,” Deporre said. “There is still the potential for some seasonal strength in the last couple of weeks of the year, but so far, there are few signs of a traditional Santa Claus rally.”