Small Caps Dive Again
I’m sorry to hound on this, but it is the one index you need to be watching right now.
The small cap Russell 2000 Index ETF (IWM) took a nosedive through the $200 price this morning. This erases the two-day 3% “hope” rally that happened just before the Fed’s meeting on Wednesday and will turn the heat back up on the market.
The IWM is now preparing to break below Monday and Tuesday’s lows, putting it on a course for a 4-5% correction over the next week or so
The economic calendar is light next week, and earnings season is all but over. This means that stocks are going to trade more off their valuation and not the headlines.
If the Russell 2000 index coughs, the rest of the market is likely to catch a cold here.
Stay cautious on areas of the market that aren’t part of the AI industry.
New Highs
It’s a phrase that we’ve heard until we’re green in the face this week. Seriously, I’m getting tired of hearing Jim Cramer and his crew say the words “all-time-high”, I got the point… everything is trading at their all-time highs.
False!
There are roughly 2,300 stock that trade on the NYSE. Of those, we’ve seen an average of about 4% trade to new highs recently, and the trend is moving lower.
The chart below shows new highs on the NYSE for the last year-and-a-half. Note that the number of new highs is trending lower, but the market is moving higher.
The reason is obvious, the S&P 500 continues to drive higher on the successes of the large cap technology stocks alone.
This situation can sustain itself until the broader market kicks into its own bull market mode, but that’s not likely to happen until the beginning of the next earnings season in July.
Investors Are Turning More Fearful
The latest CNN Fear & Greed Index readings reflect more fear than you might expect.
Despite the never-ending mentions of new highs in the market, investors appear to be wary. That’s good, it signals that they may not be drinking Wall Street’s Kool-Aid, but there’s a catch.
The fact that investor sentiment is sliding towards more fearful readings is good for the market. Market bottoms are identified by excessive fear.
I April the Fear & Greed index hit readings of “Extreme Fear” at the same time that the S&P 500 posted a nice tradable bottom. The same in September 2023 as stock prepared for a fantastic year-end rally of 17%.
The current trend suggests that we’re not going to get out of June without some widespread selling on the S&P 500 and yes, the Nasdaq 100.
Today’s Story Stock
RH (RH)
RH, formerly known as Restoration Hardware, reported their earnings this morning. The company’s report was not good, and their outlook appears to be in question after management raised their outlook for their fiscal year 2025 last quarter.
The earnings aren’t the story here.
RH is well-known for attracting high income consumers. For that reason, the company’s activity is often used as an indicator of where the economy is heading.
It works like this. High income consumers are often the first to cut their spending when their outlook for where the economy is headed turns sour. This is why retailers like RH are a great indicator of where the economy is heading.
RH shares are trading 22% lower for 2024 with the stock trading 18% lower today.
Investors should maintain a bearish outlook on RH shares with a target of $200.
Today’s Trade Idea
NuScale Power Corporation (SMR)
Yesterday I wrote about how the artificial intelligence (AI) industry is expanding its reach further into the service and support companies, but there’s an area that many investors may not be thinking about yet.
One industry that is revving-up to be part of the AI revolution are the utility companies.
We’re facing growing demand from population growth and electric vehicles, but the demand for energy from the AI industry is likely to dwarf everything else as computing power, storage and cooling will all boast hefty requirements for electricity.
Over the next few weeks, we’ll talk about that in these pages. Today I want to put one stock that I’ve been tracking in this area on your radar.
NuScale designs and produces small modular reactors. Right now, pressure is being placed on the traditional electricity companies to provide multiples of the power they produced just years ago. Many companies like NuScale Power are developing solutions using light nuclear power to meet that new demand.
NuScale’s shares currently trades above $8 with a bullish trend. The stock saw a Golden Cross pattern form in April, indicating that the stock’s bullish momentum was increasing.
A break above $10 will begin to attract institutional investors as well as the attention of long-term retail investors.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.