The Big Switch Has Started. Don’t Mis s Out

Saturday, 13 July 2024

[2 min read]

Dear Reader,

Finally we are starting to see some movement out there in market land.

The US CPI figures released during the week have confirmed for many that inflation is coming off the boil rapidly and conviction that rates will start dropping soon is rising.

That saw an immense switch out of hot mega-cap tech stocks and into the smaller end of the market. A very interesting development that you should keep your eye on going forward.

It is not often you see the Nasdaq drop 2.3% on the same day that the Russell 2000 small-cap index jumps 3.6%.

One swallow doesn’t make a Summer, so it is just worth noting for now. We need to consider the repercussions if a switch out of large caps and into small caps is going to gather steam as rates start dropping.

The US dollar should also start coming under pressure after treading water for the last couple of years. Gold reacted to the drop in interest rates after the CPI figures came out by jumping close to its all-time high.

I have been saying that we need to see a monthly close in the US 10-year bond yield below 4.20% before I will increase my bullishness on bonds.

The 10-year rate dropped 10bps to 4.20% on Thursday after the CPI figures on Wednesday. So it will be important to keep an eye on them over the next few weeks and consider whether adding interest rate sensitive exposure is the right trade going forward.

The long-term trend has recently turned up in the S&P/ASX small-cap index [ASX:XSO] and the S&P/ASX emerging companies index [ASX:XEC]. But I have been waiting for some added confirmation before I was willing to wade back into the beaten up small-cap sector in a big way.

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