As discussed in our Gitlab story above, investors and traders continue looking for a new home for their cash. Wall Street calls this a “rotation” where money flows to new areas as investors seek opportunities to generate alpha. And many analysts say that explains at least some of the recent moves we’ve seen in the stock market.
Don’t worry; we break it down below. 👇
Our first chart shows the Nasdaq 100 and S&P 500 indexes, which are dominated by mega-cap stocks, both up heavily this year. While that’s great for passive investors, it puts portfolio managers in a difficult spot as we go into year-end. Many professional money managers will have an index like the S&P 500 as their benchmark but will venture out beyond those stocks in an effort to generate an excess return for their clients. 🕵️♂️
However, as the Russell 2000’s lackluster return through early November showed, most stocks were not up as much as the S&P 500 and its leading constituents. In other words, it’s not been easy for active portfolio managers to create portfolios that are beating the S&P 500’s return this year.
And with a month left in 2023, they need to play catch up so their numbers look good for their year-end reports. 📝
So, how can they play catch up? They might sell some of their biggest winners, like Apple, Nvidia, etc., and “rotate” that money into other stocks that have not run as much and may have the potential to move very quickly.
As an example, here are some sharp moves in beaten-down stocks over the last five days. Gamestop, Carvana, Beyond Meat, and even marijuana stocks Tilray and Aurora Cannabis. Many of these stocks have been left for dead and have high short interest, but they can move very quickly once they get some momentum going. As the last few days have shown… 😮
Besides some of these crazier names, names in the mid and small-cap indexes like the Russell 2000 are again seeing money flow into them. The Russell 2000 index had one of its best Novembers in decades, roaring back from negative territory and nearing double-digit gains for the year. 📈
So, what does this mean for the broader market? Well, bulls and bears have very different interpretations of the recent action.
Bulls say the broadening out of participation is a positive thing, as more stocks going up should support the broader stock market indexes. They also cite the potential for lower interest rates in 2024 and the strong economy as reasons why this bull run can continue. 🐂
Meanwhile, bears say the “dash for trash” is a sign that the market has gotten ahead of itself and is due for a pullback. They claim shares of bad businesses like Beyond Meat and Tilray would only be rising due to rampant speculation and that they’re doomed to come crashing back down. They’re also less optimistic about the economy and, therefore, the stock market. 🐻
As always, we’ll have to wait and see who is right. But we wanted to build on our recent explanation of what’s potentially happening in the stock market right now.