Why investors should be wary of New Year's 'fake heads' for this hot asset class

“Data that comes in too cold will kill the idea of ​​a rate cut starting in March, and data that comes in too cold will kill the idea of ​​a soft landing,” says Michael Cramer, founder of Mott Capital Management. “This means Goldilocks should return from the Christmas trip.” To Aruba and appear this week.”

is reading: A stock investor's guide to the first trading days of 2024

On our website Call of the day From MacroTourist blogger Kevin Muir sees a rally in penny stocks as one of the main themes for next year, although investors should be careful not to get in too early.

In the post, Muir draws on a 2021 observation from Raoul Paul, co-founder and CEO of financial media platform Real Vision, who posted on Twitter Now

Paul pointed out how hedge funds and asset managers start the new year with a clean investment slate, but after two weeks they start moving to what are called Wall Street consensus trades for next year. Once the rest of the investment world enters, the trend reverses or corrects, and these managers return to their stable or are forced to start over.

Given the Fed's shift away from monetary tightening at the end of 2023, small caps will end up as equity leaders this year, Muir says. He is a bull in that asset class, and he signaled his readers to buy in early November and December.

After a tough year, the Russell 2000 RUT rose in late 2023 as it became clear that federal interest rate hikes, especially hard on small businesses, were coming to an end.

Based on this Russell 2000 chart, Muir says he got the timing right for that bullish call:

However, Muir says he's concerned that the rise was mainly due to “hedge fund covering,” rather than a strong signal that the bear market for those stocks is over.

One reason, he points out, is that the stocks that rose higher at the end of 2023 were the most shorted — and he shows a more concise Goldman Sachs chart here:

The chart is evidence of how hedge funds discovered when the Fed suddenly headed toward interest rate cuts at its December meeting. Within a few hours of the Fed's announcement, the Luxor index rose 15%. But along with that, the ARKK Innovation ETF ARKK also rose, which is a red flag for Muir.

This short index is closely related to the ARKK and the Russell 2000 small-cap index, he said.

So, it's possible that the small-cap push “is just a rally in hedge funds' short covering that will ease now that the buying has faded.” Based on Raoul-Paul's theory, it makes sense that hedge funds and other investors might pile into the asset class.

Muir says he stands by his view that small businesses are cheap and deserve the gains. “However, if this small-cap rally is real, it cannot be led by foolishness. We cannot have GS Rolling Most-Short leading the charge. We need a high-quality small-cap rally.”

So the correlation between the broader small cap indices and the short-sold index (which is also closely linked to the ARKK index) must break down.

“As an alternative to this index, and as a hedge against my small-cap long position, I am shorting ARKK. So far, short covering has sent all of these smaller-cap stocks higher, but my bet is that an actual small-cap bull market will see much better differentiation.” “And a new micro-cap leadership will emerge (and it won't be ARKK),” he says.

Markets

US Stock Index Futures ES00
-0.85%

YM00,
-0.63%

NQ00,
-1.17%
They fall sharply as Treasury yields rise BX:TMUBMUSD10Y BX:TMUBMUSD02Y. gold GC00,
+0.16%
up, oil CL.1,
+2.11%
It rose 2% after Iran sent warships to the Red Sea after the US Navy sank some boats supported by the Houthi militias. The Hang Seng Index (HK:HSI) fell 1.5% after weak factory activity in China.

Buzz

US non-farm payrolls data for December is due on Friday, with the Institute for Supply Management's manufacturing report and minutes from the Federal Reserve's December 12-13 meeting due on Wednesday. Construction is scheduled to begin at 10 a.m. Tuesday.

is reading: The health of the US labor market looms large on the markets' radar this week

apple apple,
-0.54%
It fell 2% in premarket after Barclays analysts downgraded the iPhone maker's weight to equal weight from underweight, due to signs of weak sales of the iPhone 15 and other devices.

Voyager Therapeutics VYGR Stock,
-4.20%
rose 32% after the biotech announced a licensing deal with Novartis's Novartis Pharma unit NOVN,
+0.99%.

Joey Way Way,
+0.81%
It is 11% off after Baidu BIDU,
+1.08%
It canceled a $3.6 billion bid for the Singapore-based streaming platform.

bitcoin bitcoin dollar,
+4.48%
At $45,447, the highest level not seen since April 2022, on hopes of ETF approval.

China BYD 002594,
-2.73%
It sold 3.02 million electric cars in 2023, which means it could overtake Tesla's TSLA.
-1.86%
Sales for the second year in a row.

The west coast of Japan was hit by several strong earthquakes on New Year's Day, killing at least 30 people and potentially causing more quakes. Separately, passengers miraculously survived a Japan Airlines plane that caught fire on the runway.

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Chart

More on the small business warning from Chris Kimble at See It Market. He points out that investors may become greedy as some major resistance levels for the Russell 2000 approach:

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