Sledding out of the gate yesterday was challenging; the market never gained traction.

There were smatterings of buying in the small-cap area; otherwise, it was ugly, especially for momentum stocks.

Small-Caps, Bottom Fishing & January Effect

The top advancers in the S&P 600 (small caps) included names destroyed over the past couple of years. Without a doubt, there are opportunities there, but reactions to news and analyst upgrades suggest that the risk-reward is skewed, so it is fine to chase these names:

The iShares Russell 2000 ETF (IWM) has hit a strong support level against the iShares Russell 1000 Growth ETF (IWF), but it needs to break through key moving averages and pick up sustained momentum.

The flip side of being this close to a breakout this long is that soon, the tide will turn and move back the other way. The clock is ticking, but assumptions about small-caps could provide a tailwind.

Freaky Monday?

According to Bespoke Research, the worst-performing stocks in the market were up. They averaged +3.17% for the session, suggesting that bottom fishing ahead of the January Effect has begun.

Selling Winners?

What’s fantastic about the session is that the 26 names in the Russell 1000 that have increased 100% or more this year were drubbed as investors began ringing the register.

Intriguingly, investors have enough gains to ride these names into next year and delay a potential tax hit.

That being said, some of these gains are what you would expect over several years, not months, so there is no doubt that investors have been waiting for signs that the moves have peaked. Once enough get their sell signals they hit the exits simultaneously, triggering additional sell signals.

It was a freaky session, for sure.

Inflation Expectations

The New York Fed Consumer survey saw a slight uptick in inflation expectations:

• 1-year horizon: 3.0% +0.1%
• 3-year horizon: 2.6% +0.1%
• 5-year horizon: 2.9% +0.1%

Meanwhile, consumer spending growth expectations remain at their lowest point since April 2021.

Today’s Session

There is some steadiness this morning, after firm hands finally blinked yesterday.

Two Mag Seven names received upgrades:

• Meta Platforms (META) new target $670 at Piper Sandler
• Tesla (TSLA) “Top Pick” at Morgan Stanely target $400

Super exciting news from Alphabet (GOOGL) on its new state of the art quantum computing chip. Developed by its quantum AI team, the company said the chip has demonstrated the ability to not only exponentially correct errors, but also solve standard computation.

Alphabet (GOOGL) was also named “top pick” at Piper Sandler, which also downgraded Pinterest (PINS).

Look for Mag Seven to lead the way this morning, while other tech names struggle.

Oracle (ORCL) posted its results and unlike software names that involved “AI” in the past two weeks, its shares are under pressure.

The Joy is Back

The Optimism Index saw the highest reading since June 2021,  rising by 8 points in November to 101.7 after 34 months of remaining below the 50-year average of 98. Of the 10 Optimism Index components; nine increased, none decreased, and one was unchanged. Following last month’s record high of 110, the Uncertainty Index declined 12 points as business owners became more certain following the election.

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