The first trading day of the New Year looks set to challenge the Santa Rally theory, with Dow futures down over 200 points as bond yields surge. An Apple downgrade may not have helped investor confidence.
This week will bring the minutes of the Federal Reserve’s last meeting and important December jobs data.
“Data that comes in too hot will kill the idea of rate cuts starting as soon as March, and data that comes in too cold will kill the idea of a soft landing. It means Goldilocks must return from her Christmas trip to Aruba and appear this week,” says Michael Kramer, founder of Mott Capital Management.
Onto our call of the day from MacroTourist blogger Kevin Muir, who sees a rally in small-cap stocks as one big theme for the coming year, though investors should beware of getting in too soon.
In a post, Muir draws on a 2021 observation from Raoul Paul, co-founder and CEO of Real Vision financial media platform, who posted on Twitter now X, at the time about the perils of piling into “head fakes” or new ideas in January.
Paul noted how hedge funds and asset managers start the new year with a clean investment slate, but then two weeks later start moving into so-called consensus Wall Street year-ahead trades. And once the rest of the investment world gets in, the trend reverses or corrects, and those managers get back to flat or have to start over.
Muir says given the Fed’s pivot away from monetary tightening at the end of 2023, small-caps will end up as stock leaders this year. A bull on that asset class, he flagged his readers to buy in early November and December.
After a tough year, the Russell 2000
rallied late in 2023 as it became clearer that Fed interest rate increases, particularly hard on smaller companies, were drawing to a close.
As per this Russell 2000 chart, Muir says he did get the timing right on that bullish call:
However, Muir says he’s concerned that the rally was mainly from “hedge fund covering,” and not a solid signal that the bear market for those stocks has ended.
One reason, he notes was that the stocks blasting higher at the end of 2023 were the most heavily shorted — he offers the Goldman Sach’s most-shorted index chart here:
The chart is evidence of how hedge funds that got caught out when the Fed surprisingly guided toward interest rate cuts at the December meeting. Within a few hours of the Fed announcement, the Most-Short index had rallied 15%. But along with that, the ARKK Innovation ETF
also shot higher, a red flag for Muir.
That short index is tightly correlated to ARKK and the Russell 2000 small-cap index, he said.
So says it’s possible the small-cap push was “just a hedge fund short-covering rally that will sag back down now that the buying has flamed out.” And based on Raoul Paul’s theory, it makes sense that hedge funds and other investors may be piling into the asset class.
Muir says he stands by his view that small-caps are cheap and deserving of gains. “However, if this small-cap rally is for real, then it can’t be led by crap. We can’t have the GS Rolling Most-Short leading the charge. We need quality small-cap stocks to rally,” he said.
So the correlation between broader small-cap indexes and the most-shorted index (also tightly correlated with ARKK) will have to break down.
“As a proxy for this index, and a hedge against my small-cap long position, I am shorting ARKK. So far, the short covering drove all these smaller capitalized stocks higher, but my bet is that an actual small-cap bull market will see much better differentiation, and that new small-cap leadership will emerge (and it won’t be ARKK),” he says.
U.S. stock index futures
is up, and oil
is up 2% after Iran sent warships to the Red Sea after the U.S. Navy sank some Houthi militia-backed boats. The Hang Seng
fell 1.5% after weak China factory activity.
|Key asset performance
|10 year Treasury
|Data: MarketWatch. Treasury yields change expressed in basis points.
U.S. nonfarm payroll data for December is due Friday, with the Institute for Supply Management’s manufacturing report and minutes of the Dec. 12-13 Fed meeting both on Wednesday. Construction spending is due at 10 a.m. on Tuesday.
is down 2% in premarket after Barclays’ analysts cut the iPhone maker to underweight from equal weight, on signs of weak iPhone 15 and other hardware sales.
said it delivered 484,507 EVs in the fourth quarter, producing 494,989. Deliveries grew 83% to 1.81 million for 2023 as a whole. Tesla shares are slipping. Meanwhile, China’s BYD
sold 3.02 million electric vehicles in 2023, eclipsing Tesla a second-straight year.
Japan’s western coast was hit by several heavy earthquakes on New Year’s Day, leaving at least 30 people dead and more quakes could come. A collision between a Japan coast guard plane and a Japan Airlines flight that caught fire on the runway on Tuesday resulted in the deaths of five people.
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