Market Moves

The S&P 500 index (SPX) and the Nasdaq 100 (NDX) both closed about one-quarter percent higher as bond prices retreated nearly that same amount. Today marks the third day this week of similar tight-range trading featuring lower-than-average volume on the indexes. This is not an unusual outcome for the first week of earnings season, and it shows that investors are patiently waiting for more news to become available about the current state of profitability in the corporate world.

The chart below depicts various asset classes of stocks, including large-cap exchange-traded funds (ETFs) that track the S&P 500 (SPY), the Nasdaq 100 (QQQ), and the Dow Jones Industrial Average (DIA), as well as large-cap growth stocks (SPYG), small-cap stocks (IWM), and microcap stocks (IWC). Through the year 2019, it is no surprise that large technology stocks are leading performers. What is surprising is the twist that has happened in this pattern over the past six weeks. 

Chart showing the performance of major stock indexes

Small Caps Surge in Recent Trading

When small-cap stock indexes outperform large cap indexes, it is usually a bullish signal from investors. It implies that they are willing to accept more risk and therefore will buy stocks at higher and higher prices.

The Russell 2000 index and the Russell Microcap Index have spent most of the year underperforming compared to the large-cap indexes, but that may be about to change. The chart below shows how, over the past six weeks, small-cap stocks have surged higher, and even after their recent pullback, they are just edging out the Nasdaq 100.  

Chart showing the performance of the Russell 2000 versus other major indexes

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Can Microsoft Break Resistance After Earnings?

Microsoft Corporation (MSFT) has had a good year so far, even considering the relatively flat trading pattern the stock has made over the summer. Now with earnings only one week away, it might be worth noting how traders are setting up their expectations for the company's quarterly announcement. 

The chart below shows the current price pattern of the stock, how it is in a large trading range for the past three months or so. The cone at the end of the chart shows how options market makers are pricing their options on the stock in the week leading up to earnings. They expect that it is about 70% likely that the stock will stay in the range depicted by the cone after the day of earnings. That's a rather small cone considering the way the stock has performed lately.  

Chart showing the share price performance of Microsoft Corporation (MSFT)

The Bottom Line

Stocks held in a tight range, closing slightly higher and showing hesitancy among investor until more earnings reports come through. If earnings reports disappoint investors, the stocks leading the way will fall, and right now, that is small-cap stocks. Microsoft traders appear to have low expectations for big moves in Microsoft shares.

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