The large stocks did indeed drag indexes lower yesterday after President Trump announced that discussions between the U.S. and China are beginning to bear fruit. The big story in the market though over the last few weeks is not a bounce in the large indexes, but rather, the stellar performance of the small stocks, i.e. the small-caps. The Russell 2000 (IWM) has jumped 4.62% over the last 9 trading day, which stacks up against gains of 3.5% on the blue-chip Dow for the same period of time. Perhaps what’s even more interesting is that the IWM has aggregate gains of 2.5% for the last month, whereas the S&P 500 is trading up 0.6%.

The small stocks, for weeks now, have been trouncing the large indexes, which pushed the IWM to new historic highs. The Dow Jones and the S&P 500, on the other hand, are nowhere near March’s resistance levels, not to talk about the historic highs recorded in January.

It’s self-evident that the underperformance of the large indexes has been caused by pockets of weakness in large stocks, “the big caps.” Granted that thanks to Buffett, Apple (AAPL) has recorded nice gains of late, but that notwithstanding, other large stocks like Google (GOOGL), Caterpillar (CAT), Goldman Sachs (GS), 3M (MMM) and Verizon, among others, have lagged behind.

This split in the shape market movement has taken has made trading challenging. If you look at either the S&P 500 or the Dow Jones, there are solid technical reasons to be worried. But if you refocus and turn your gaze to the small-caps, those arguments get cast out the window. The NASDAQ and the NASDAQ 100 are, when all is said and done, somewhere in between these two polarities – and they have the potential to rally to the highs previously recorded this year.

Therefore, the work-plan can be to focus on trading the strength of the small-caps, without being too worried about the large indexes. The bearish spin on the small-caps’ outperformance is that what we’re seeing is usually the last leg. Speculation plays out as the market approaches its peak, similar to what happened way back then in 2000, when the NASDAQ and internet stocks rose indiscriminately, before a substantial peak was formed.

Perhaps – and it just could be that the bearish camp is right – but the bulls argue otherwise, that you can never time the market’s downturn just right. Therefore, they argue, it’s better to ride the wave as long as possible, while simultaneously having your finger on the trigger, ready to identify a change in price movement. This is a splendid market for individual stock traders who know how to focus on the small-caps.

I am continuing in my pursuit to find strong movement in tech stocks, but the same also goes for energy stocks. I’ve added to my position in CLSD. ARNA continues to see a lot of momentum and the small Chinese company, BZUN, skyrocketed yesterday in response to its earnings reports, showcasing stunning trading opportunities from the get-go.

This market is precisely the type that rewards what I would call “junk stocks.” Companies trading at cheap prices, the only support they have being the story behind them. Good examples are: VVPR, FCSC, and EGY.

I’m also continuing to track the iShares Barclays 20+ Yr Treas.Bond (ETF) on my trading screen. It’s continued to fall, a harbinger of a rise in yields and expectations for higher interest rates. The downtrend in TLT has constituted a weight on the larger market. Yesterday, the yield on the 10-year T-bond broke up past 3.1% per year, for the first time since 2011. That is now the most bearish element affecting the market. The moment yields start to fall slightly, we can expect that to be a precursor of another upward push in the stock market. As such, we can summarize by saying that the battle playing out in the market is a tug of war between positive factors: strong economic figures, strong earnings reports and a tax cut, up against all of the negative factors: geopolitical concerns, expectations for rising inflation (and resultantly, higher interest rates) and lastly, the trade discussions with China.

Friday: Today’s Economic Calendar will be rather slim, meaning that trading will be shaped by the last stretch of earnings news. AMAT and JWN are among the most prominent companies reporting their numbers after closing yesterday. AMAT fell in late trading by almost 4.5%, while the retail sector stock, JWN, crashed more than 7%. Be on the lookout, too, for DE and CPB, which will be two of the most attention-worthy companies reporting before the opening bell.



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