This year’s stock market growth has largely occurred due to the broad backs of big company brands. But those days might be over for a while.
“For much of 2021, Apple AAPL, Amazon AMZN, Microsoft MSFT, and a few other big-cap technology names drove the indices to a series of new highs,” James “Rev Shark” Deporre wrote recently on Real Money. “The FATMAAN names gave the market the appearance of great strength, but under the surface thousands of stocks struggled and made little progress.”
With Amazon and Apple struggling, positive seasonality and the Russell 2000 chart setting up, the market environment now looks good for smaller and secondary stocks. There are good reasons for that, Deporre said.
“One of the difficulties of this two-tiered action is that it creates overbought conditions for the indices, although most stocks aren't even close to being extended,” he noted. “Traders constantly wonder if secondary stocks can perform well while the indices undergo a correction.”
Both Amazon and Apple posted relatively poor reports last week. They were not the typical blow-outs that kept them consistently running higher..
The big question at this point, Deporre said, is whether some of the money that has been driving the FATMAAN stocks will now rotate into small-caps and secondary names.
“The conditions for such a rotation are nearly perfect,” he noted. “Positive seasonality that is particularly good for small-caps is just starting, the Russell 2000 has been in a trading range for most of the years and is set up well for a breakout, and many small-caps have attractive valuations and stories.”
In that regard, conditions could not be better for a rotation from the Nasdaq and Nasdaq 100 and into the Russell 2000.
“Whether it happens, we will have to wait and see,” Rev Shark said. “I'll be watching the price action carefully and will stay focused on stock picking.”