Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, discussed the complexity of current market dynamics in an interview on CNBC. She noted the challenging nature of interpreting market movements this week, citing stretched sentiment levels and high valuations, particularly in large-cap growth sectors. Despite these concerns, she acknowledged a notable broadening out of market activity, with sharp movements in the Russell 2000 index indicating significant investor reactions. Calvasina emphasized the importance of considering the broader market context, including the typical continuation of bull markets and the substantial move in the Russell 2000. However, she warned against over-optimism regarding Federal Reserve actions and market positioning, highlighting that the market’s recent rapid changes could induce caution.

Sentiment and Valuation Concerns

Calvasina noted that sentiment levels were stretched across various indicators, with markets, particularly in the large-cap growth sector, appearing overvalued. This has led to underlying nervousness among investors. However, she also pointed out a significant broadening of market participation, citing sharp movements in the Russell 2000 index earlier in the week. These rapid shifts, she explained, tend to unsettle investors, especially when they occur in such a short timeframe.

Bull Market Context and Russell 2000 Movements

Despite these concerns, Calvasina highlighted the overarching bull market backdrop, with double-digit gains in the first half of the year typically indicating continued upward momentum. She emphasized the importance of the Russell 2000’s recent moves, suggesting that such significant movements relative to the broader market are not merely blips but critical indicators of market sentiment.

Historical Comparisons and Small Cap Analysis

Calvasina delved into historical comparisons, noting the discrepancy between the Russell 2000’s and the S&P 500’s performance. Despite some historical outperformance by the Russell 2000, she remains cautious. Her analysis revealed that the Russell 2000 only outperforms the S&P 500 about 35% of the time over the next six months in similar scenarios. This uncertainty underscores the need for a comprehensive view of the market landscape.

Valuation and Positioning in Small Caps

Focusing on small caps, Calvasina discussed the positioning favoring a small-cap reversion, though valuations were not as attractive as they were the previous year. She pointed out that the Russell 2000’s price-to-earningsThe price-to-earnings ratio, often abbreviated as P/E ratio, is a fundamental metric used by investors and analysts to evaluate the relative value of a company's shares in the stoc... More ratio was slightly below its average, providing some valuation room. However, the enthusiasm spurred by recent CPI data led to rapid market movements, prompting questions about the sustainability of such optimism, particularly concerning Federal Reserve policy.

IWM Technical Analysis

The chart for the Russell 2000 Ishares ETF (IWM) shows the following:

Trend Analysis:
The overall trend in the chart appears to be upward, with a recent breakout above the resistance level around $215. The price is currently retracing slightly after hitting a high around $225.

Support and Resistance Levels:

• Major resistance is at approximately $225.
• Key support is around $215, which was the previous resistance level now potentially acting as support.

Moving Averages:

• The 50-day moving average is at $206.70, indicating short-term support.
• The 200-day moving average is at $196.19, providing long-term support.

Volume Analysis:
Recent trading volume shows a spike, indicating strong interest and potential support for the recent price movement.

Relative Strength IndexIn the world of technical analysis, the Relative Strength Index (RSI) stands as a cornerstone tool for traders seeking insights into market momentum. Developed by J. Welles Wilder ... More (RSI):
The RSI is at 63.59, suggesting the ETF is in the bullish territory but not overbought.

On-Balance VolumeThe On Balance Volume indicator (OBV) is a technical analysis tool used to measure the flow of money into and out of a security over a specified period of time. It is a cumulative ... More (OBV):
The OBV line is showing a declining trend, which might indicate that the upward price movement is not supported by volume, suggesting caution.

Stochastic RSIIn the realm of technical analysis, the Stochastic RSI (StochRSI) emerges as a powerful tool for traders seeking to navigate market dynamics with precision. Developed by Tushar S. ... More:
The Stochastic RSI is at 0.522, showing a neutral position but indicating potential for future bullish momentum.

Chaikin OscillatorNamed after its creator Marc Chaikin, the Chaikin Oscillator stands as a formidable tool in the arsenal of technical analysts. This oscillator is designed to measure the accumulati... More:
The Chaikin Oscillator is at -5.58M, suggesting selling pressure in the recent sessions.

MACDThe MACD indicator is essentially a momentum indicator that shows the relationship between two different moving averages of price. The MACD is the difference between the 12-period ... More Oscillator:
The MACD line is above the signal line, with values of 5.34 (MACD) and 2.25 (Signal), showing bullish momentum.

Time-Frame Signals:

• 3 months: Hold – The recent breakout and current consolidation suggest that waiting for further confirmation is prudent.
• 6 months: Buy – If the price remains above the new support at $215 and the upward momentum continues.
• 12 months: Buy – The long-term trend is upward, and the 200-day moving average provides solid support.

Past performance is not an indication of future results. This article should not be considered as investment advice. Always conduct your own research and consider consulting with a financial advisor before making any investment decisions. 🧡

Fed Optimism and Economic Outlook

Calvasina expressed caution regarding the prevailing optimism about potential Fed rate cutsWhen the Fed cuts rates, it reduces the cost of borrowing for consumers and businesses, which can stimulate spending and investment. Fed rate cuts also have consequences that affec... More. She noted that market expectations often fluctuate rapidly, leading to potential overreactions. The interview highlighted that while there are reasons for optimism, such as confidence in a soft landing for the economy, the certainty around Fed actions and their implications remains a point of contention.

Election Uncertainty and Market Impacts

The interview also touched on the perceived certainty around upcoming elections and their potential market impacts. Calvasina compared the current sentiment to the regional banking crisis of the previous year, suggesting that sometimes it is best to let events unfold rather than trying to predict every market twist and turn.

Financials, Energy, and Historical Playbook

Throughout the week, financial and energy sectors saw significant movements, driven by historical analysis and comparisons to previous election years. As the week progressed, skepticism emerged about whether past patterns would repeat in the current economic environment.

Earnings and Market Rotation

Calvasina emphasized the crucial role of earnings in supporting further market rotation. She highlighted the importance of earnings momentum in small caps relative to large caps. While there has been some improvement in small-cap earnings revisions, she noted that overall earnings softness poses a challenge. The upcoming earnings season will provide more clarity on whether the positive momentum in small caps can be sustained.

Insights

1. Market valuations are stretched, especially in large-cap growth sectors.
2. The Russell 2000 index experienced sharp, significant movements.
3. Historical analysis suggests mixed outcomes for small-cap outperformance.
4. Earnings revisions are crucial for sustaining small-cap market momentum.

The Essence (80/20)

• Market Complexity: The market is experiencing multiple, simultaneous influences making it hard to dissect current trends.
• Valuation and Sentiment: High valuations and stretched sentiment levels are causing underlying market nervousness.
• Russell 2000 Movements: Sharp movements in the Russell 2000 index highlight investor sensitivity and broader market implications.
• Historical Context: Past performance suggests that small-cap outperformance relative to the S&P 500 is not guaranteed.
• Earnings Revisions: Positive earnings revisions are essential for continued small-cap momentum but are currently mixed.

The Guerilla Stock Trading Action Plan

1. Evaluate Valuations: Regularly review valuation metrics across different market sectors to identify potential risks and opportunities.
2. Monitor Market Sentiment: Keep track of investor sentiment indicators to gauge market overextensions.
3. Analyze Index Movements: Pay close attention to significant index movements, particularly in small caps, to understand broader market shifts.
4. Historical Analysis: Use historical performance data to inform investment strategies but remain cautious of over-reliance on past trends.
5. Focus on Earnings: Prioritize earnings revisions in investment decisions, especially within small-cap stocks, to gauge future performance potential.

Blind Spot

Over-Optimism on Fed Actions: There is a risk of overestimating the Federal Reserve’s ability to navigate current economic conditions, which could lead to unexpected market corrections.

Looking Ahead

In summary, Lori Calvasina’s insights underscore the complexity of the current market environment. Investors face multiple influences, from stretched valuations and rapid market movements to Fed policy uncertainty and election impacts. While there are reasons for cautious optimism, particularly in small caps, Calvasina advises a careful approach, emphasizing the need to let market events unfold and to closely monitor earnings reports for further guidance. As the market navigates these multifaceted dynamics, her analysis provides a comprehensive framework for understanding and responding to the challenges and opportunities ahead.

RBC Capital’s Lori Calvasina FAQ