Week of small-cap outperformance
Last week it was the small capitalisation stocks that outperformed the rest of the market. The weekly change of the Russell 2000 index was 0.41% while the so-called big indices S&P 500 (-0.13%), DJIA (-0.46%) and Nasdaq (-0.25%) all lost ground. Friday was a day that salvaged the week for the US indices, at least to a certain extent. With small caps once again performing the best (+1.76%) the rest of the market followed (S&P 500 +1.09%, DJIA +0.67% and Nasdaq 100 +1.44%) on Friday. This performance is a bit lacklustre though and leaves something to hope for. It gives a mixed message of the investors’ willingness to commit to the market. At least in the short to medium term. (For the futures symbols and their explanations see the end of the report.) By reading further you agree with our disclaimer at the bottom of this page and acknowledge that we do not provide investment advice.
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With S&P 500 as the basis, the relative performance of the stock market sectors indicates that the overall sentiment is rather bullish. With technology and financials gaining and utilities losing ground the conclusion is that the investors are feeling somewhat bullish about the markets – even with President Biden potentially hiking the capital gains tax significantly.
While the new tax proposals promised by the Biden administration are a risk there are several other factors that suggest the markets are still in buy-the-dips mode. Let’s take a quick look at some of them.
- The Fed. The Fed has on several occasions repeated its commitment to ultra-accommodative monetary policy. The rates are likely to stay near zero while asset purchases continue
- Stimulus. The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration has indicated it will seek to deliver another two trillion dollars in infrastructure spending.
- Low yields. After trending higher since the beginning of August 2020, the Treasury yields have been moving lower for about one month now. All in all, the yields and interest rates are extremely low on both nominal and real basis.
- Positive earnings. Since the beginning of the current earnings season of 123 S&P 500 companies that have reported 85% have exceeded consensus estimates.
- Consumption. While Personal Savings Rate has been ranging around 5% to 6% over the last five years the current rate is still 13% after the peak caused by the pandemic.
Hesitation at the ATH values
ES (S&P 500 e-mini future) hesitated last week near the all-time high values but was able to close up on Friday by 1.09%. This is positive but the fact that for one full week the market wasn’t able to break into new highs raises the question of whether the bulls are worried about the tax hike rumours and their impact on market sentiment.
A decisive break below 411.50 support would be (short-term) bearish and indicate that the market participants feel it necessary to take some of the recent winnings of the table. The next significant support area is 3955 – 3981. This is where several technical factors (23.6% retracement level, 50-day SMA and recent swing high) coincide and make it a significant support zone. In case the market corrects to the zone we will be looking for buying opportunities at or near the zone.
Futures ticker codes: ES = S&P 500 e-mini future, YM = DJIA e-mini future, NQ = Nasdaq e-mini future, RTY = Russell 2000 e-mini future
Chief Market Analyst
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