Recent Manipulation in Small Caps Led To Friday’s Big Breakout

I wasn’t expecting a huge 4% move in small caps on Friday, but I was looking for this group to start flexing its muscles. I’ve been telling our EarningsBeats.com members that small caps were poised for a big move to the upside. We’ve seen the kind of “value to growth” rotation in small caps that we saw during last summer’s massive large cap rotation from value to growth. I discussed in length how the big Wall Street firms were manipulating retail traders. While the overwhelming major of folks expected the cyclical bear market to continue, the story the charts were telling was much, much different. We saw the result. From the ultimate 2022 bear market low on each index, here are how our key indices have performed since that time:

  • Dow Jones: +17.80%
  • S&P 500: +22.65%
  • NASDAQ: +31.24%
  • NASDAQ 100: +39.33%
  • S&P 400 Mid Cap: +14.62%
  • S&P 600 Small Cap: +11.70%

A 20% advance represents a new bull market. The NASDAQ 100, NASDAQ, and S&P 500 have now exceeded that threshold. Fortunately, we at EarningsBeats.com didn’t need to see the advance to turn bullish. We saw it coming and it’s just gotten started. But shhhhhh, please don’t tell the bears. Skepticism is what drives bull markets, so let’s keep it our little secret.

Perspective is Critical

It simply amazes me how many analysts will talk about the narrow leadership found in the mega cap leaders in technology and communication services in 2023, but fail to mention how much many of these stocks suffered during the 2022 cyclical bear market. Let’s take NVIDIA Corp (NVDA) as an example. NVDA was 346 in November 2021, when tech stocks began rolling over. It didn’t manage to find a bottom until October 2022, when it reached 108!!!! That’s a loss of 69% in just under a year. Shouldn’t that be given some consideration, when we discuss its massive 2023 advance? Once all the inflation hype deflated, a mass move back towards the big growth names was inevitable. We said it was coming and that it would be explosive. Why? Because that’s what historical perspective tells us.

The NASDAQ 100 fell 38% during the 11-month cyclical bear market. The S&P 500 lost just 27%. The S&P 600 (Small Caps) lost 28%. I expected the NASDAQ 100 to outperform when the cyclical bear market ended. If you recall Q4 performance, then you remember that the S&P 500 CRUSHED the NASDAQ 100 from the October low through the end of the year. The rotation to more aggressive areas was not only overdue in 2023, but it should have been expected. But when it happens, the permabears find yet another reason to ignore the 2023 rally – breadth.

Listen, I’m totally fine recognizing that breadth was weak. But it’s a secondary indicator, like everything else other than price/volume, which is my ONLY primary indicator. Primary indicators MUST confirm secondary indicators. It’s that simple. Bear markets brainwash us though. Retail traders, based on the equity only put call ratio ($CPCE), didn’t truly turn bearish until May 2022 – just before a major low printed in June, the very next month. Big picture sentiment doesn’t change overnight. It takes a lot of days of CNBC for all the bad news and awful market action to begin to sink in. When it finally sinks in, though, you can’t get it out of your head to objectively assess the stock market. Wall Street firms were buying growth stocks HAND OVER FIST in 2022, just as everyone was turning excessively bearish. That enabled those pesky market manipulators (oops, meant to say market makers) to buy growth stocks incredibly cheap (example: NVDA) for themselves, their firms, and their wealthy clients.

We’ve Been Hoodwinked!

It’s very clear to me that all the rotation into aggressive large cap areas in 2022 preceded the HUGE 2023 move in key sectors like technology (XLK), which has now gained 34% year-to-date. The big Wall Street firms got it right, as usual, and this chart helps to illustrate intraday QQQ manipulation that I began discussing a year ago:

If you want to know more about what these different color-coded periods represent, please refer to a previous article of mine, “Wall Street’s Hunger Games Are Now Complete”. But essentially, I refer to the intraday manipulation that took place during these various periods. It’s worth the read, if you didn’t read that article.

Some have said that one of my favorite intermarket relationships, consumer discretionary (XLY) vs. consumer staples (XLP), was bearish and showing no signs of life. After doing further research, ignoring the manipulative gaps, and studying intraday rotation, I completely disagree. Money has been rotating into discretionary vs. staples all year, but it’s been masked by the opening downside gaps in the XLY. If we strip out gaps and only consider intraday rotation in the XLY:XLP ratio, we see a MUCH different picture. Check this out:

The top of this QQQ:SPY chart ignores gaps and has been rising since last year’s May bottom. But if we allow the market makers to cloud the picture and include gaps (bottom panel), then we see a different picture. The top panel is provided only because we do independent research and use the User-Defined Index (UDI) feature at StockCharts.com to provide the ACTUAL rotation taking place. Our EB.com members KNOW what’s truly been happening and were prepared for the bullish action that we’re seeing in 2023.

Now It’s Time for Small Caps To Surge

I’ve been highlighting the extreme rotation from value to growth among both mid caps and small caps the past couple months, just as I discussed the rotation to growth of large caps a year ago. There’s only reason why money rotates to aggressive stocks under the surface of the S&P 500 action. Because future economic activity favors these stocks. So look at all the breadth indictors you’d like. Discuss the lack of participation until the cows come home. The fact of the matter is that the big Wall Street firms have been pouring into small cap growth vs. value and mid cap growth vs. value since March. I believe this accumulation is going to lead to a breakout and significant advance in the small cap world and IWM is the small cap ETF that tracks the Russell 2000. While I’ve been favoring investment in the IWM recently, I’ve been building a sizable position in the leveraged ETF – TNA – that tracks the IWM at a 3 to 1 clip. So returns (and possible losses) are tripled. First, I want you to see the visual rotation from value to growth:

Small Caps:

Mid Caps:

It’s really difficult for me to be bearish when I see this type of bullish rotation, topped off with major breakouts like the one on Friday regarding small caps.

Tomorrow morning, I’ll be featuring another must-know story about this small cap breakout in our FREE EarningsBeats.com newsletter, the EB Digest. If you’re not already a subscriber, it’s simple. CLICK HERE to enter your name and email address. It’s free, no credit card required, and you may unsubscribe at any time!

Happy trading!

Tom