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This Market Rotation is Huge

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OVERVIEW
Money Finally Moving To Growth

Source: Finviz

Good morning, Swingly traders!

Let's dive into today's review. We're seeing some interesting shifts in the equities market. On Friday, Nvidia, which has been leading the recent megacap rally, finally broke down and dipped below its 10-day EMA. Considering Nvidia's worth of over $3.3 trillion, this is a pretty big deal.

Looking at the performance breakdown, megacaps have been dominating over the past month. But in the last week, and especially on Friday, their performance has slowed down. Instead, small and midcaps have been picking up the pace, with both seeing over a 50% increase in performance over the last three weeks. They were the two leading groups as we closed out last week's session.

What does this mean?

This shift suggests that the bigger players (hedge funds and institutions) might be rotating out of the larger, more established "safer" companies. This is especially significant given the recent uncertainty about the battle against inflation. However, the latest CPI and PPI data show significant improvements, which puts pressure on the Fed to start being more dovish with their interest rate policies.

As a result, smaller and more speculative growth companies, which typically don't fare well in high interest rate and high inflation environments, are finally seeing some love. This means we might want to start paying closer attention to small and midcap stocks, as they could offer new opportunities for gains in the near future.

Nasdaq

QQQ VRVP Daily Chart

Let's talk about the Nasdaq. We've seen growing selling pressure over the last three sessions after the QQQ topped out at $489. This heavy selling volume, especially above $485, is being driven mostly by Nvidia. With several hundred billion dollars being pulled out of this leading stock in the leading sector and industry group, it's no surprise that the QQQ is seeing a pullback.

We expect to see a controlled move down to the rising 10-day EMA, where the Nasdaq should find support. This isn't a bad thing, and we really want to emphasize that. The market was quite unhealthy and narrow last month, with only a handful of stocks making any real progress higher.

It's very normal and healthy to see rotation. In fact, this should get you excited because the most volatile and explosive stocks are now starting to get some love. This shift can bring new opportunities for gains as the market broadens out. So, keep an eye on those smaller, high-potential stocks

S&P Midcap 400

MDY VRVP Daily Chart

On Friday, we saw a big jump in buying pressure, and the MDY is testing its point of control (POC) again. This time, though, there's real demand and a strong group of buyers that could finally push the midcaps above $538. This level is crucial because it coincides with the falling daily 20-EMA, and breaking above it would mean the MDY has overtaken all of its daily EMAs.

The MDY has shown great relative strength compares to the Nasdaq with it’s last week’s trading pushing the midcaps higher whereas the QQQ has declined in the same period.

Russell 2000

IWM VRVP Daily Chart

Let's take a look at the small caps. They're following a similar pattern to the midcaps, with the IWM seeing massive buying volume on Friday. It's currently making a push to test its descending level of resistance at $201.50, which also aligns with its falling daily 10-EMA.

The Russell 2000 is trading well below its point of control (POC), but the big spike in volume on Friday indicates a significant change in character. Our analysis suggests that this could be the start of a "small cap summer" after all.

Today, we want to see the IWM break above and hold $202- we suspect this to be quite likely.

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DAILY FOCUS
Start Focusing on Small/Mid Cap Growth

We're going to keep repeating this until we're blue in the face: go where the money is going. A healthy sector rotation out of the large mega cap technology names is good. It means you can finally trade stocks that can run +100-200% in just a couple of weeks.

We've curated a list of all the high growth, strongest relative strength names in the small/mid capitalisation groups. We'll be closely watching these to see if any start breaking out in today’s session. This doesn’t mean blindly buying any small cap. Of course not. It means your focus now shouldn't be where it was last month. Be dynamic and start going where the money is being pumped in.

WATCHLIST
The Leaders

ROOT: Root, Inc

ROOT Daily Chart

  • ROOT was one of the strongest stocks earlier this year, making a run of over +500% following its earnings-based episodic pivot. The stock has shown extreme revenue and earnings growth and is starting to get really tight just below its 10-EMA.

  • The falling wedge it has been in since mid-May looks poised to break in today’s session, signaling a huge shift in momentum and trend. This could be a significant opportunity, so keep an eye on ROOT for potential breakout action.

AFRM: Affirm Holdings, Inc

AFRM Daily Chart

  • Affirm just got upgraded to a "buy" rating by Goldman Sachs, sparking some interest pre-market. The stock, which is in the same field as ROOT, has been slowly descending in its wedge since it topped out in early January 2024.

  • A break above $32 would be significant and highlight a big change in trend. This could present the perfect low-risk buy opportunity. Keep an eye on Affirm today for a potential breakout and a shift in momentum

This newsletter does not provide financial advice. It is intended solely for educational purposes and does not constitute investment advice or a recommendation to trade assets or make financial decisions. Please exercise caution and conduct your own research.

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