Weekly Update: New Week, Same Story
Good evening, and welcome to this week’s edition of Stealth Trades!
New week, same story… small caps remain on top.
The headline of last week’s update was ‘Small Caps Lead the Way.’ In it, I discussed how smaller stocks were seeing better action, had further to go before reaching new highs, and would likely outperform mega-cap stocks like Alphabet, Microsoft and Meta going forward.
This week further proved that point.
The Russell 2000 index which represents small-cap stocks vastly outperformed the other indexes.
It gained nearly 6% this week with hundreds of stocks surging by double digits.
Homebuilders and other names tied to the construction sector soared as well. Dream Finders Homes (DFH) is a stock we own in my Alpha Stocks portfolio. It is up 21.5% in just the last two weeks.
We also own Eagle Materials (EXP) and are sitting on a 17% open gain in just a few weeks.
Momentum in this sector has accelerated thanks to this week’s meeting of the Federal Reserve Board. Not only did the Fed keep rates at their current level, notes also revealed their plan to cut interest rates at least three times in 2024.
After more than tripling from 1.3% to 5% in two years bond yields are aggressively falling on this news.
Rates are 110 basis points off their October highs which is prompting an uptick in mortgage applications and will likely lead to an increase in new construction starts.
With the exception of crypto, the best-performing areas of the market right now are all tied to construction – steel, home builders, building products and banking.
With the Russell 2000 up 22% in the last eight weeks, don’t be surprised if we stall here or even pull back slightly.
The index is currently butting up against a level that has acted as resistance since 2022.
Will we get through it? Yes. But don’t be surprised if it takes a few weeks to digest the supply up here.
After such a powerful rally, the market needs to digest this move and prepare for the next leg higher. The ideal situation would be to see a couple weeks of tight trading to finish out the year. This could set up a strong first quarter rally to start 2024 out strong.
We took profits in several of our positions this week. We believe in selling into strength and nailing down gains when they come quickly.
But the bull market is likely just beginning. After two years of chop, the market is poised for a powerful bull market – the likes of which I feel few are prepared for. And small-cap stocks are favored to be the biggest winners.
Best wishes for your trading,
