Big Tech Retreats! Small Cap Stocks Show Momentum?

Big tech collectively closed down yesterday due to the “special rebalancing“ while small cap $iShares Russell 2000 ETF(IWM)$ shows strength.

1. Special rebalancing in $NASDAQ 100(NDX)$ to reduce big tech’s weight to 38.5%

The $NASDAQ 100(NDX)$ is preparing to adjust the weightings of its 100 components, particularly focusing on the "magnificent seven" stocks: $Microsoft(MSFT)$ , $Apple(AAPL)$ , $NVIDIA Corp(NVDA)$ , $Tesla Motors(TSLA)$ , $Alphabet(GOOG)$, $Meta Platforms, Inc.(META)$ , and $Amazon.com(AMZN)$ .

Currently, these seven stocks account for more than half of the index's weight. The rebalance aims to address overconcentration in the index and will take place on Monday, July 24. The weighting adjustments aim to reduce the combined weight of the five companies with the largest market caps to 38.5%.

The rebalance is prompted by concerns that these few stocks may be distorting the overall health of the stock market. The performance of the "magnificent seven" stocks has been impressive in 2023, contributing to the strong performance of the Invesco QQQ ETF, which tracks the Nasdaq index.

2. Why does small cap show strength?

Back in June, big tech led the stock market.

The major tech stocks, including $Apple(AAPL)$ , $Microsoft(MSFT)$ , $NVIDIA Corp(NVDA)$ , $Amazon.com(AMZN)$ , $Meta Platforms, Inc.(META)$ , $Tesla Motors(TSLA)$ , $Alphabet(GOOG)$ , and $Broadcom(AVGO)$ , have contributed 100.56% to the year-to-date increase of the S&P 500 index as of June 1st.

This means that the remaining 492 companies in the index have contributed -0.56% to its gains this year, indicating a lack of overall market depth.

However, the rise of weighted stocks gradually spreads to other mid-cap and small-cap stocks, continuing to drive the upward momentum of the US stock market. Therefore, the S&P 500 equal-weighted index is anticipated to outperform the S&P 500 index in terms of returns.

As a result, the small cap stocks $iShares Russell 2000 ETF(IWM)$ will begin to rise due to the sector rotation.