Why investors should be wary of New Year ‘head fakes’ for this hot asset class

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.

Read: A stock investor’s guide to the first trading days of 2024

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.

The markets

U.S. stock index futures



are falling sharply as Treasury yields

climb. Gold

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






S&P 500






Nasdaq Composite






10 year Treasury


















Data: MarketWatch. Treasury yields change expressed in basis points.

The buzz

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.

Read: Health of U.S. labor market looms large on markets’ radar this coming week


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.

Voyager Therapeutics stock

is up 32% after the biotech announced a licensing deal with Novartis unit Novartis Pharma


is off 11% after Baidu

cancelled a $3.6 billion offer for the Singapore-based live-streaming platform.


is at $45,447, a high not seen since April 2022, on ETF approval hopes.


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.

Best of the web

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Why Suze Orman never goes out to dinner

Topless massages, cage fights and private flights: CEO mishaps of 2023

The chart

More on small-cap caution from Chris Kimble at See It Market. He points out that investors may be getting greedy as some big resistance levels approach for the Russell 2000:

See It Market

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:


Security name


Marathon Digital Holdings





AMC Entertainment

Coinbase GLobal

Mullen Automotive

Riot Platforms

Random reads

New Year’s Eve in a Japanese cat bar.

Woman sues Hershey for $5 million over a faceless Reeses pumpkin.

Viral Burger King worker buys first home after crowdsourcing.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

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The Magnificent 7 dominated 2023. Will the rest of the stock market soar in 2024?

2023 will go down in history for the start of a new bull market, albeit a strange one.

Despite some year-end catch-up by the rest of the S&P 500 index, megacap technology stocks, characterized by the so-called Magnificent Seven, have dominated gains for the large-cap benchmark
which is up 23.8% for the year through Friday’s close.

That’s the result of “extreme speculation,” according to Richard Bernstein, CEO and chief investment officer of eponymously named Richard Bernstein Advisors. And it sets the stage for investors to take advantage of “once-in-a-generation” investment opportunities, he argued, in a phone interview with MarketWatch.

MarketWatch’s Philip van Doorn last week noted that, weighting the Magnificent Seven — Apple Inc.

 , Microsoft Corp.
 Amazon.com Inc.
 Nvidia Corp.
 Alphabet Inc.

 Tesla Inc.
 and Meta Platforms Inc. 

— by their market capitalizations at the end of last year, the group had contributed 58% of this year’s roughly 26% total return for the S&P 500, and that’s down from a breathtaking 67% at the end of November.

The chart below shows that the percentage of stocks in the S&P 500 that have outperformed the index in the year to date remains well below the median of 49% stretching back to 1990:

Richard Bernstein Advisors

Meanwhile, the tech-heavy Nasdaq Composite
has soared more than 40% this year, while the more cyclically weighted Dow Jones Industrial Average
which hit a string of records this month, is up 12.8%.

The narrowness of the rally gave some technical analysts pause over the course of the year. They warned that that it was uncharacteristic of early bull markets, which typically see broader leadership amid growing confidence in the economic outlook.

Bernstein, previously chief investment strategist at Merrill Lynch, sees parallels with the late-1990s tech bubble, which holds lessons for investors now.

The market performance indicates investors have convinced themselves there are only “seven growth stories,” he said. It’s the sort of myopia that’s characteristic of bubbles.

The consequences can be dire. In the 1990s, investors focused on the economy-changing potential of the Internet. And while those technological advances were indeed economy-changing, an investor who bought the tech-heavy Nasdaq at the peak of the bubble had to wait 14 years to get back to break-even, Bernstein noted.

Today, investors are focused on the economy-changing potential of artificial intelligence, while looking past other important developments, including reshoring of supply chains.

“I don’t think anyone is arguing AI won’t be an economy-changing technology,” he said, “ the question is, what’s the investing opportunity.”

For his part, Bernstein argues that small-cap stocks; cyclicals, or equities more sensitive to the economic cycle; industrials; and non-U.S. stocks are all among assets poised to play catch-up.

“I don’t think one has to be overly sexy on this one…it may not make a huge difference as to how you decide to execute and invest” in those areas, he said. “There’s a bazillion different ways to play this.”

Those areas are showing signs of life in December. The Russell 2000
the small-cap benchmark, has surged more than 12% in December versus a 4.1% advance for the S&P 500. The Russell still lags behind by a wide margin year to date, up 15.5%, or more than 8 percentage points behind the S&P 500.

Meanwhile, an equal-weighted version of the S&P 500
which incorporates the performance of each member stock equally instead of granting a heavier weight to more valuable companies, has also played catchup, rising 6.2% in December. It’s now up 11% in 2023, still lagging behind the cap-weighted S&P 500 by more than 8 percentage points.

Bernstein sees early signs of broadening out, but expects it to be an “iterative process.” What investors should be aiming for, he said, is “maximum diversification,” in direct contrast to 2023’s historically narrow market, which reflects investors rejecting the benefits of diversification and taking more concentrated positions in fewer stocks.

To be sure, while the Magnificent Seven-dominated stock-market rally has attracted plenty of attention, it doesn’t mean those individual stocks have been the sole winners in 2023.

“I will say, ‘magnificent’ is in the eye of the beholder,” said Kevin Gordon, senior investment strategist at Charles Schwab, in a phone interview.

The seven stocks that account for such a large share of the S&P 500’s gains do so mostly due to their extremely “mega” market caps rather than outsize price gains. And that’s just, by definition, how market-cap-weighted indexes work, analysts note.

That doesn’t mean the megacap stocks are necessarily the best performers over 2023. While Nvidia, up 243%, and Meta, up 194%, top the list of year-to-date price gainers in the S&P 500, Apple Inc.

is only the 59th best performing stock, with a 49% gain. Combine that with a $3 trillion market cap, however, and Apple proves one of the biggest movers of the overall index.

What was bizarre about the 2023 rally wasn’t so much the megacap tech performance, Gordon said, but the fact that the rest of the market languished to such a degree until recently.

Clarity around the economic outlook and interest rates help clear the way for the rest of the market to play catch-up, he said. Fears of a hard economic landing have faded, while the Federal Reserve has signaled its likely finished raising rates and is on track to deliver rate cuts in 2024.

For stock pickers that didn’t latch on to the few winners, 2023 was brutal. Passive investors who just bought S&P 500-tracking ETFs should feel good.

So why not just chase the index? Bernstein argues that could spell trouble if the megacap names are due to falter. That could make for a mirror image of this year where gains for a wider array of individual stocks is offset by sluggish megacap performance.

Gordon, however, played down the prospect of “binary outcomes” in which investors sell megacaps and buy the rest of the market.

If troubled segments of the economy, such as the housing sector, recover in 2024, investors “could definitely see a scenario where the rest of the market catches up but it doesn’t have to be at the expense of highfliers,” he said.

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Why Don’t We Have a Cure for Alzheimer’s?

In November of 1901, a young German psychiatrist and neuroanatomist, Alois Alzheimer, found what appeared to be misfolded proteins forming sticky clumps, or plaques, between the neurons in the brain tissue of a patient who had died from dementia. Inside the neurons he found threadlike twists, called neurofibrillary tangles, of another protein. Eventually these plaques and tangles came to define the disease named after him: Alzheimer’s disease.

By the mid 1980s, these strange proteins had been identified as beta-amyloid proteins, and by the 1990s it was widely accepted that an excess of these proteins caused the formation of the plaques, which in turn caused the disease. The tangles, which turned out to be malformed strands of a protein called tau, were thought to be a result of the amyloid plaques. For the past 30 years, the bulk of research on Alzheimer’s, and most of the efforts to find a cure, have been based on the amyloid hypothesis.

However, after decades of research based on this hypothesis, drug trials have mostly struck out. No drug tested has produced meaningful improvement in the symptoms of the disease. Even drugs that reduce amyloid levels in the brain haven’t done what really matters: improve the lives of people with Alzheimer’s disease.

In January of this year, a new Alzheimer’s drug, lecanemab, was approved by the FDA even after the deaths of several trial participants raised questions about the drug’s safety. Safety issues aside, lecanemab is far from a cure. It did not stop the progression of the disease, and it reduced cognitive decline by only a small amount. “It’s a small step in the right direction,” says Donald Weaver, MD, PhD, clinical neurologist and Alzheimer’s researcher at the University of Toronto, “not a big stride.”


Are We in a Rut?

These disappointing results have led many researchers to ask if the amyloid hypothesis needs rethinking. Marissa Natelson Love, MD, is a neurology researcher at the Heersink School of Medicine at the University of Alabama at Birmingham. Natelson Love has focused her research on anti-amyloid therapies based on the amyloid hypothesis and is recruiting patients for further studies on lecanemab. Still, she says, “Every time we have a meeting, someone asks, ‘Are we on the wrong track?’” Perhaps, as Weaver once put it, Alzheimer’s research is in an “intellectual rut.”

There’s a reason science sometimes gets in these ruts. Science is a slow, accretive process that builds upon work — often decades of work — that came before.

Researchers complete PhDs on a particular topic, then go on to be postdocs in the lab of an established scientist in the same area. Soon there’s an entire body of researchers with years of training and experience in one approach to a given problem, explains Michael Strevens, PhD, philosopher of science at New York University. “There’s a protocol, what you might call a recipe book, for doing the science. Whereas with a new, untested hypothesis, no one has yet written the recipe book.” This isn’t laziness, but momentum. Like a giant ocean liner, research can’t turn on a dime. When it comes to Alzheimer’s, the momentum is mostly behind the amyloid hypothesis. The roles of other processes in the course of the disease, such as inflammation, prior infections, or autoimmune illness, have gotten short shrift.

Still, we shouldn’t throw the baby out with the bathwater. The problem may not be with the amyloid hypothesis, but with the specific drugs being tested. Maybe researchers just haven’t found the right drug. Or maybe these are the right drugs and they’re just being given at the wrong time; it could be that in order to be successful, anti-amyloid treatments need to start long before symptoms appear.

Another possibility is that the selection of trial participants has not been ideal. Until the past decade or so, Alzheimer’s couldn’t be definitively diagnosed until after death. “If we go back and look at the autopsies from previous Alzheimer’s disease studies,” says Natelson Love, “not everyone in the study actually had Alzheimer’s.” Not only might that explain why a particular trial was unsuccessful, but it could also have a downstream effect on future research. If researchers were unknowingly testing a potential Alzheimer’s treatment on patients who didn’t have Alzheimer’s, that data would be flawed — and later research that drew on it could be flawed, too.

New techniques make it possible to diagnose Alzheimer’s before death. Imaging tests like MRI can rule out other reasons for memory loss; specialized PET scans can detect beta-amyloid plaques and tau proteins. Cerebrospinal fluid can now be tested for biomarkers of amyloid and tau, and though not yet widely available, some new blood tests can detect the presence of amyloid. While these techniques are not enough to diagnose the illness alone, they are making it much easier to confirm it in living patients.

Traffic Jams in the Brain

New approaches to studying amyloid plaques might also change the trajectory of Alzheimer’s research. Rather than just trying to rid the brain of plaques and tangles, researchers are now investigating the biological pathways that created them in the first place. As Scott Small, MD, director of the Alzheimer’s Disease Research Center at Columbia University, put it, “One of the reasons there’s been such frustration is because we haven’t yet fully understood what’s fundamentally broken in Alzheimer’s, what’s fundamentally wrong. If you don’t know what’s fundamentally broken, you can’t fix it.”

Though Small says he has great respect for the amyloid hypothesis, he agrees that clearing plaques, while beneficial, results in only “subtle slowing of cognitive decline.” If you want to have a meaningful impact on the illness, he says, you need to get to the actual source of the pathology by addressing the cellular biology of the disease. He and his colleagues are pursuing that approach, looking for the source of the problem at the cellular level and trying to discover what is happening inside neurons to create the problems between neurons.

Small and others are seeking the source of the problem in endosomes, organelles inside cells that regulate the movement of proteins. Proteins on their way out of the endosomes get blocked, creating what Small calls “traffic jams,” eventually leading to the buildup of amyloid and tau proteins and thus to Alzheimer’s. They’re working on therapies that would unjam endosomes.

Meanwhile, a variety of other approaches to the problem are gaining traction. Weaver’s lab in Toronto is working on the hypothesis that Alzheimer’s disease is an autoimmune disorder in the brain. The hypothesis is that amyloid is not an abnormal protein, but a normal component of the brain’s immune system, produced in response to bacterial infections. The problem, as with all autoimmune illnesses, is that something goes wrong with the immune system, causing it to attack the body’s own tissues; in this case, the amyloid confuses healthy brain cells with infectious bacteria and attacks brain cells instead of or along with the bacteria. The result, of course, is Alzheimer’s disease. Because the drugs used to treat autoimmune illness in other parts of the body do not have a therapeutic effect in the brain, Weaver and colleagues are researching drugs that target the immune pathways specifically in the brain.

Other researchers are looking into possible connections between infections and the inflammation associated with Alzheimer’s. Kristen Funk, PhD, a neuroimmunologist at the University of North Carolina, Charlotte, studies how the body’s inflammatory response to viral infections, such as herpes simplex and viral encephalitis, affects cognition and might be linked to the development of Alzheimer’s.

Some evidence suggests that Alzheimer’s could be a metabolic disorder, much like type 2 diabetes. In fact, some researchers have called Alzheimer’s “diabetes of the brain” or “type 3 diabetes.” Insulin resistance in the brain can lead to inflammation and oxidative stress, and eventually to amyloid plaques and Alzheimer’s. Bolstering this theory are findings that some diabetes drugs may reduce the risk of Alzheimer’s.

Alzheimer’s takes a long time to develop. The damage to the brain that eventually results in the disease can begin 20 or even 30 years before memory loss or other symptoms. In a way, that’s a cause for hope: if we could only figure out how to stop it or slow it down, we’d have so much time to do it. Epidemiological studies, studies that look at who gets Alzheimer’s and when, offer some hints about prevention. Those studies suggest that although the end result is amyloid plaques in the brain, the disease could actually be caused by a number of factors at once.

While genetics certainly plays a role, some of those risk factors are modifiable: obesity, diabetes, cardiovascular disease, high cholesterol, high blood pressure, hearing loss, and depression are some known ones.

As more evidence suggests that modifying those risk factors can prevent — or at least reduce the risk — of Alzheimer’s, many researchers are looking at what they call a multimodal approach to prevention. Lifestyle interventions, like an improved diet and more exercise, reduce the risk of cardiovascular disease and diabetes. Existing medications that control blood pressure, cholesterol, and blood sugar, for example, become a key part of this approach to prevention. Something as simple as fitting a patient with hearing aids or addressing their loneliness and isolation might be effective as well.

The beauty of these interventions is that they’re mostly low risk. Treatments for the risk factors for Alzheimer’s have already been in constant use for years. They’re likely to be relatively inexpensive and are typically covered by Medicare and other insurance plans. Lecanemab, on the other hand, is expected to cost more than $25,000 per year.

“Who can afford that?” asks Weaver. “Is it going to be restricted to wealthy people in wealthy countries? Ultimately, I hope that somebody comes up with an agent which is cost-effective to produce, cost-effective to distribute, and therefore may actually have a global impact on this disease.”

Most researchers agree that the final answer will likely involve a combination of approaches. “I think, just like in cancer, [Alzheimer’s treatment] is eventually going to be a cocktail that will bolster people’s resilience to the breakdown of the nerve cells, as well as remove some of the things triggering it,” says Love.

Any real hope for a cure for Alzheimer’s likely rests not on any one hypothesis, but with the willingness of scientists to question themselves, each other, and their prior assumptions. That doesn’t mean the years spent with a laser focus on amyloid have been wasted. But researchers do agree that it’s time to look more closely not only at the amyloid paradigm, but also further afield, in the hope of finally making progress against this devastating illness.

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