Small-Cap is another frenzy after AI?
Compared to the AI frenzy that greeted the entire market last week due to the iconic earnings report of $NVIDIA Corp(NVDA)$ this week has seen opportunities for other small and medium-cap stocks instead of AI stocks. Morning Star's Barometer shows that small-cap growth and small-cap value stocks are more favored by investors.
Small-cap growth stocks have been favored
Firstly, the fundamental reason for this is the increase in investor risk appetite. For example, high-preference institutional investor Cathie Wood, without holding NVIDIA (NVDA) (not benefiting from the AI frenzy), has outperformed the large-cap stocks this week.
Stocks related to digital currency, such as $Coinbase Global, Inc.(COIN)$ and $Marathon Digital Holdings Inc(MARA)$ , have gained popularity in the recent surge of digital currency.
Medical concept stocks have also found opportunities in the rise of small-cap biotech companies. Examples include $Viking Therapeutics(VKTX)$ and $Beam Therapeutics, Inc.(BEAM)$
Earnings Volatility
some second-tier growth stocks, which has increased volatility. Some companies were expected to perform strongly before the earnings report, leading to an overextended trend. These companies often have stronger consistent expectations, but if the "difference" after the earnings report is significant, it is more likely to cause market fluctuations.
Lemonade, Inc. (LMND) surged 8% before the earnings report but dropped significantly after the report missed expectations. Beyond Meat, Inc. (BYND) exceeded expectations and triggered short covering, resulting in a surge of over 70%. Short covering often leads to a chain reaction.
Short covering has also become a catalyst for the rebound of some small-cap stocks. The "short king" of 2023, Carvana Co. (CVNA), has also seen a rebound. Currently, the short interest ratio of $Bit Brother Limited(BETS)$ and $Children's Place(PLCE)$ exceeds 140%.
And those of “memes” $Jumia Technologies AG(JMIA)$
In addition, PCE data cautious.
Shorts will manage their positions more cautiously, while longs will hope to accumulate a higher safety cushion at the right time.
If the PCE data significantly exceeds expectations (indicating strong inflation), the market may once again move towards a consensus expectation of "postponed rate cuts," which could lead to a more cautious pullback. If the PCE data falls short of expectations, it would be favorable for a rate cut in March and would also be more bullish for growth stocks, especially small-cap growth stocks.
If the PCE data is not significantly different from expectations, overall market volatility will further decrease, especially in the options market where IV may accelerate its decline. This may lead to a lack of direction in the short term, and shorts may be less willing to hold positions for the long term.
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