On July 11, 2024 there was a large move up in U.S. small cap stocks as measured by the Russell 2000 (RUT) stock index. Correspondingly on the same day there was a large drop in technology stocks. Prior to July 11, 2024 technology stocks were the main sector pushing U.S. stocks higher, small caps significantly lagged. Now the roles are reversed.
An educated guess can be made as to who could be causing the U.S. stock market rotation.
It requires large and concentrated buying/selling to move a stock market either up or down. Large mutual and large hedge funds are the primary movers in stock markets, and they need large cap stocks to buy or sell. Big money will trigger huge moves in small caps stocks. When there are not many shares available, huge purchases or selling could cause large price movements.
It’s a good guess that big money is not jumping in to buy small cap stocks. If they aren’t buying then who is buying? Its probably small money – small funds and individual traders. The key word is – small.
The daily chart of Nvidia Corporation (NVDA) and RUT illustrates the U.S. stock market rotation.
Since the NVDA all-time high made on 06/20/24 it has declined 19.80%. Durning the same time RUT has risen 12%. A staggering role reversal!
Just from 04/1924 to 06/20/24 NVDA gained an incredible 84%, and this is on top of an enormous rally in 2023. NVDA is not the only stock with huge gains, there are several others mostly in the tech sector.
At some point in a stock buying mania the stock price rise exceeds the fundamentals of the company. If the gap between stock price and company fundamentals is large, even an improvement in fundamentals may not be enough to move the stock higher.
It’s possible the U.S. stock tech sector has reached the point where their stock prices have moved far above their fundamental valuations.
The recent decline of NVDA and other tech sector stocks could be the early phase of taking profits. If so could the proceeds be going into small cap stocks? For small money its probable. For big money its highly unlikely.
Big money people could be allocating the funds into large cap stocks that have previously underperformed the market. These underperforming large cap stocks likely have weak fundamentals. The most likely scenario is that the profits are going into cash.
Traders were stopped out of a 50% short position of non – leverage Russell 2000 related fund initiated at the open of trading on 07/19/24. The loss on half the position is 1.39%. Continue to hold the second half of the position with a stop loss on a move above the RUT 07/17/24 peak at 2,278.12.
Four Dimension Trading 