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 RUT 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:
MacroTourist
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 ARKK 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 ES00, -0.84% YM00, -0.63% NQ00, -1.17% are falling sharply as Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y climb. Gold GC00, +0.14% is up, and oil CL.1, +1.84% 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 HK:HSI fell 1.5% after weak China factory activity.
| Key asset performance | Last | 5d | 1m | YTD | 1y |
| S&P 500 | 4,769.83 | 0.32% | 3.81% | 24.23% | 24.23% |
| Nasdaq Composite | 15,011.35 | 0.12% | 4.94% | 43.42% | 43.42% |
| 10 year Treasury | 3.933 | 3.28 | -24.22 | 5.23 | 18.77 |
| Gold | 2,082.50 | 0.87% | 1.67% | 0.52% | 13.79% |
| Oil | 72.78 | -0.97% | -0.70% | 2.03% | -9.60% |
| 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
Apple AAPL, -0.54% is down 2% in premarket after Barclays’ analysts cut the iPhone maker to equal weight from underweight, on signs of weak iPhone 15 and other hardware sales.
Voyager Therapeutics stock VYGR, -4.20% is up 32% after the biotech announced a licensing deal with Novartis unit Novartis Pharma NOVN, +0.99%.
Joyy YY, +0.81% is off 11% after Baidu BIDU, +1.08% cancelled a $ 3.6 billion offer for the Singapore-based live-streaming platform.
Bitcoin BTCUSD, +4.23% is at $ 45,447, a high not seen since April 2022, on ETF approval hopes.
China’s BYD 002594, -2.73% sold 3.02 million electric vehicles in 2023, meaning it may eclipse Tesla’s TSLA, -1.86% sales for 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. Separately, passengers miraculously escaped a Japan Airlines flight that caught fire on the runway.
Best of the web
This year, resolve to pack a ‘go bag’ to be ready for the next disaster: Here’s what to put in it
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.:
| Ticker | Security name |
| TSLA, -1.86% | Tesla |
| MARA, -16.44% | Marathon Digital Holdings |
| NIO, -3.82% | Nio |
| NVDA, | Nvidia |
| GME, -2.99% | GameStop |
| AAPL, -0.54% | Apple |
| AMC, -1.45% | AMC Entertainment |
| COIN, -6.68% | Coinbase GLobal |
| MULN, +1.20% | Mullen Automotive |
| RIOT, -12.10% | 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.