Market Shake-Up: Tech Troubles and Small Cap Struggles July 18, 2024

Coming into this, it wasn’t clear if a market rotation would be positive. This justified my cautious stance since inflation hit last week. We’re now lower than we were with the CPI, even though some numbers are higher. The best approach has been tech and mega caps. While they outperformed today, they were the first to fade. Early on, chips went red, and Nvidia dropped to around 116. The market struggled, and small caps aren’t the answer. Small caps need economic strength or rate cuts to thrive. Trading small caps as a safety trade when big tech is down doesn’t make sense, as big tech will show earnings but has valuation issues. Rotation is probably negative unless big caps rise again.

The NASDAQ is now at its monthly low, breaking through support and trading just below 20K. The S&P 500 has room to fall because its breadth kept it more elevated than the NASDAQ. We’ve broken short-term averages, and there’s nothing on the news calendar to lift the market. Investors are playing the political game, but it’s too early to base market moves on that. The market depends on how big tech performs in earnings. The first test with Taiwan Simi was mixed. Nvidia firmed up by day’s end, but other rotation stocks got hit, raising the risk of a sell-off as correlations increase.

Market dispersion has been notable, with low correlations masked by tech strength and breadth. When things align, it can be painful. The NASDAQ breaking support and the S&P having a gap down signals a red risk radar. Despite expectations, the net move since the CPI event is lower, surprising some on the macro side. Hopeful economic outcomes haven’t vanished, and jobless claims are weak but not catastrophic. Still, the market isn’t compelling without big tech making new highs. The cautious stance has paid off, and with the dollar holding, Bitcoin stalling, and bonds catching bids, short-term downside is possible as correlations reconnect.