The much better than expected inflation data released on last Tuesday propelled a broad market rally, especially the Russell 2000 small cap index rallied more than the major indexes that day.  It looks as if the severely punished small cap stocks are primed to rise from ashes at this point.  In response to the better than expected inflation data, the Russell 2000 small cap index rallied 5.4% with 76% over average volume.  This is the second best weekly rally since the March 2020 bottom.

In the week of 3/27/2020, in response to the all in Fed policies to rescue the world from the unknown impacts of a pandemic, the stock market rallied and the Russell 2000 rallied 11% with 169% over average volume.  We all know that March 2020 low was a major stock market bottom and a 4-year cycle bottom.  Will last week’s small caps rally declare another 4-year cycle bottom?  In other words, could the October 2023 low be the starting point of a new 4-year stock market cycle because finally the small caps have joined the party?

It has been 43 months from the March 2020 low to October 2023 low.  43-month is a reasonable time to conclude a 4-year stock market cycle.  But, wait a minute, let’s look for the reasons why the small caps stocks topped in November 2021 and if those conditions have changed.  The Fed started to raise interest rates in March 2022, but the small cap stocks foresaw what’s coming and topped in November 2021, that’s four months before the Fed reacted to the inflationary problems.  This time the small cap stocks foresaw that the Fed would not continue to raise interest rates because inflation has come down meaningfully. So this current small cap stocks rally is in response to the peak interest rates for this Fed tightening cycle, perhaps this small cap stocks October 2023 low marked a valuation low for this 4-year cycle (March 2020 – ???).  The small cap stocks have gone thru a brutal bear market from November 2021 to October 2023, that’s almost two whole years.  But the Fed is still not done with tightening, the Fed may not continue to raise, but will keep higher interest rates as long as the employment situation is tolerable.  The higher interest rates will continue to choke small cap stocks and growth stocks because these two sectors require an easy money policy to thrive, plain and simple.

That being said about the Fed’s continued tightening, we believe that the small cap stocks are not ready for a prime time to continue this rally.  But we know the small cap stocks valuation low is the October 2023 low.  Perhaps this low will be tested in Q1 2024 when the employment data gets bad and subsequently the Fed reacts to the bad employment data by cutting interest rates.  The signal we are looking for is bad employment data.  Only a bad enough employment data will force the Fed to change its policy.  The Fed has two mandates: employment and price stability.  The Fed will certainly react to bad employment data to prevent a real bad recession in 2024, which is an election year.

We hold Matterport ticker MTTR, a hot year 2021 SPAC stock in our portfolio.  MTTR has $450 million cash on balance sheet as of Q3 2023 and has no debt.  MTTR continued to execute growth strategy during the Fed’s tightening cycle.  MTTR is a leader in spatial data technology.  Amazon digital twin uses Matterport’s 3D data.  Autodesk and a few other companies have Matterport plugins in their application.  Matterport’s growth potential is in datafication of the real estate market.  With the real estate traditional commission structure under legal threat, a digital transformation in real estate is imminent.  Matterport will be a major player in the real estate market.  Matterport is an AI company too. The company has announced to profitable in 2024 thru cost cutting and revenue growth.

Matterport stock was unduly punished with the rest of SPACs and small cap stocks during this brutal bear market.  MTTR went from all time high of $37.60 to all time low of $1.84.  MTTR didn’t deserve the all time high at $37.60, that was a Covid bubble price.  MTTR didn’t deserve the all time low at $1.84 either.  At $1.84, MTTR market cap was $562 million but they had $450 million cash on hand.  The business was valued at just a little over $100 million if you take out the cash.  Their annual revenue is about $160 million.  The market is a very unreasonable place.  $1.84 is a very attractive entry point in terms of valuation, but not from the perspective of price momentum.  One can never call a bottom if there is no continued bullish momentum after a low was made.  If and when the market makes a low in Q1 2024, MTTR is a great candidate to put money to work.  The fundamentals checks out, we just need momentum technical indicators to confirm a new bull market has arrived.

Right after the market close last Friday, the shocking news of OpenAI board firing its darling CEO  rattled the entire tech world.  There are efforts from investors, particularly from Microsoft to reinstate the fired CEO Altman back to OpenAI.  The drama is on going and definitely is a negative event for the AI story.  Microsoft stock made a recent new all time high because of its investment in OpenAI.  Now OpenAI is on shaky ground.  Traders will take advantage of the event to sell the stock because it was already very expensive.

Nvidia will report earnings next Tuesday November 21 after market close.  No doubt Nvidia will report an exciting AI story.  But how will the market react to the earnings?  NVDA has been risen non stop since the market bottom on October 31.  It is a concern because NVDA has risen so much heading into the earnings report.  It is really hard for it to rally after so much gain has made already.

The stock market has been in a digestion mode in the last three trading days after a huge advance from the reaction to the better than expected inflation data.  The market got a little ahead of itself.  A little pull back is expected in the next week or so.

Again, it is around the corner that the Fed will be forced to ease and therefore a real bull market will begin.  For the meantime, we should try to stay calm and raise cash.  Mega techs are too expensive to buy and the small caps are the right price to buy, but no follow thru momentum due to higher for longer interest rates situation.

Below is the S&P 500 weekly chart.  It is 3 weeks into the current weekly cycle.  It is 15 days into the daily cycle.  On the short term daily chart, we could see some downside pressure next week.