Mike Santoli’s market notes: Main action not in the major averages, small caps ripping again

Published Thu, Jan 14 20211:08 PM EST

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. The market remains resilient, the buyers retaining control, the main near-term question still is whether bulls are starting to overplay their hand. The S & P 500 drifted higher Thursday morning to a high for the week but still failed to get above Friday's close. Could easily be short-term noise and a constructive cooling-off phase, but now folks are watchful of this area as gaining significance as a place sellers show up. That said, it increasingly seems these days that focusing on the big-cap indexes is missing the main action in this market, in the smaller, speculative, disruptive, high-concept stocks. Every day adrenaline flows into record call-option buying and traders surf from one pump-job "story stock" to the next. The Russell 2000 small-cap index is ripping again, up 2%. We commonly speak of the Russell as a key real-economy gauge, cyclical and financial and old-economy companies rising the economic wave. Sure, true, but the wildness in speculative New Era stocks is also a big driver of the Russell. Its top-five components are all alternative-energy or sports-betting plays: Plug Power, Penn National, Caesar's, Sunrun and Darling (biofuels). Together they are 3% of a 2,045-stock index, and these five are up between 100% and 670% the past six months. So the Russell isn't just a macro/yield play it's a key vehicle for the brimming animal spirits in this market. We have another blistering IPO pop for a youth-resonant digital app (Poshmark) and a reverse-LBO of a pet retailer benefitting from hopeful comparisons to Chewy's. And then there's the ARK Invest ETF complex, which fetishes disruption, reaps riches from stock momentum and is raking in enormous volumes of investor cash every day. Its $4 billion in net inflows in the first 13 days of this year exceeds what iShares has collected. There's no effective way of deciding when such aggressive buying and valuation insensitivity crosses over from a beneficial energy source to a toxic overconfidence. We had at least three years of this sort of thing in the late-'90s, with jagged, high-velocity uptrends that carried further than most expected, interrupted by periodic macro gut checks that purged a lot of the hot money along the way. Right now, loose financial conditions, generous credit markets, upturning corporate profit forecasts, more fiscal support to come and vaccine rollouts are pricing a tough combination for the cautious or bearish investor to fight. Tactically, stretched sentiment and rampant froth raise the odds of an air pocket, lowering the threshold for the type of unwelcome surprise that might cause a stumble. Something usually, though not always, comes along eventually as a test of the recent buyers' conviction. Treasury yields holding steady, the lousy jobless-claims number not causing an outright rally in bonds but keeping the 10-year under 1.1% for now. Banks still trading firm ahead of earnings. Asset manager Blackrock had stellar results, as everyone figured it would, and the stock is off 3.5% after a nice run. It's only one example but recent quarters we saw a decent "sell-the-news" effect on plenty of big earnings beats. Market breadth is solid today, near-80% upside volume on NYSE. Equal-weighted S & P beating the top-heavy version. Same story with the VIX , lower on days the indexes rally but still holding above 22. There's a bid for downside protection and a reluctance to sell volatility outright given election and potential for the markets to correct in coming weeks (some evidence of this pattern in the first quarters of a presidency from a new party, FWIW).

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics.