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The Rotation to Small Stocks: Warning Sign or New Beginning for the Market

Despite favorable odds, the post-Thanksgiving trading session this time did not bring a positive day for the S&P 500. However, there was quite a bit of speculative activity under the surface.

Due to the strength of smaller stocks, the market breadth was positive with about 5,350 gainers to 4,100 losers, but the Magnificent Seven struggled with a loss of nearly 1%, which negatively affected the major indexes.

There was a long list of small-cap stocks with gains of more than 10%, and more than 750 companies reached new 12-month highs. However, the media tends to ignore the action in smaller stocks, which contributed to a more somber mood.

Economic news was mixed, with signs of stubborn inflation offset by stronger growth. Bonds rose, but the dollar weakened. The probability of the Fed cutting interest rates by a quarter point on December 18 is now about 66%.

Bitcoin (IBIT) rebounded sharply as aggressive dip buyers stepped in. While there are vocal pessimists predicting a top in the crypto sector, the conditions remain favorable for continued strength regardless of stock performance.

The main theme in the market over the past few weeks has been a rotation into smaller stocks and aggressive speculative trading. This has led to higher levels of volatility, but it has also created an excellent environment for investors with shorter time horizons.

Next week, this theme will be tested as the holiday festivities end and attention turns to economic issues. Many market participants see the relative weakness of the Magnificent Seven as a warning sign of a market that needs a break, but this seems like a necessary condition for a healthier, more valued market.

December is likely to be a month that favors active trading in smaller stocks. Keep a positive attitude and work a little harder to find trading opportunities.

Remember that the session will be shortened on Friday!

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