Small Caps Lead Market Higher; Inflation in Focus

by | May 17, 2018

A day after bond yields jump small caps follow-up with solid gains. Volume was lower across the board, but not a huge surprise given we have seen this story before. Materials led the S&P 500 with gains over 1%. Real Estate and Utilities were the biggest losers as higher interest rates impact these two sectors. 10 year Treasury Notes yield more than 3.1% as Bond Traders are hinting at higher inflation. During high inflationary periods stocks tend to do well and perhaps it’s the reason why we are seeing money flow to small cap stocks. We follow price and could care less what the precise reason for the rise. Would you rather miss the move and know why or capture majority of the move? The answer is obvious and we’ll let the CNBC stock market pundits battle out the reason why. Meanwhile, we’ll take advantage of this market. This market is relentless, but we are prepared for whatever it will throw at us. Be prepared by ignoring the noise and keep a sound, prudent risk management process. Wherever this market will go we’ll follow.

Neutral respondents to the AAII survey continue to be high. Bears dropped to 21% while Bulls rose to 37%. Bears are near an extreme, but usually we’d see Bulls above the 40% mark when Bears sit at 20%. It will be interesting to see how the market moves from here with Bulls creeping higher. NYSE advance/decline line is performing well so we may very well see this market continue higher without regard to where sentiment sits. It would be nice to see the market consolidate gains a bit here and accumulation show up. In the meantime, we will just have to see how this market works itself out.

There are quite a few bearish articles popping up across financial media. No, we are not talking about ZeroHedge. Inflation is going to scare a lot of people, but stocks do very well during inflationary periods. Now, the Federal Reserve Bank will do all it can to curb inflation. Gas prices and interest rates are certainly acting like we have something cooking. Inflation will do a number on those who simply struggle to meet day-to-day needs. Regardless if things get out of hand or not we must make sure we stick to a sound risk management process. Cutting losses and keeping position sizes in check will help us maximize gains in this market.

We hope you have a great weekend. Continue to ignore the noise and follow price!