Traders devoured the tech stock dip.
The Nasdaq took its gut punch like a champ, springing off the mat Wednesday for a gain of nearly 1.5%. The one-day comeback makes up for most of Tuesday's losses. But many of the popular tech stocks look like they need more rest before fighting back toward their highs.
That's why market rotation has been our big theme this month. The first six months of 2017 are almost behind us. If you want to continue banking short-term gains in this market, it's time to reevaluate your positions and jump on the most lucrative trends for the third and fourth quarters.
Luckily, the market continues to offer clues as to what stocks and sectors will shine during the second half of the year.
Just look at small-caps...
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As of early December, the small-cap Russell 2000 had jumped 40% above its February lows thanks in part to an incredible 14-day run to cap off November trading. That was the index's longest winning streak in more than 20 years. The Russell then followed up its furious post-election rally with six months of range-bound action.
But something changed in early June.
While most traders remained laser-focused on the big tech winners, we started to see signs of the next small-cap surge. The small-cap rally moved too far, too fast back in November. But after blowing off some steam, these stocks signaled they were ready to once again outperform their large-cap cousins.
That's exactly what's happened this month. Take a look for yourself...
The Russell 2000 has gained more than 4% in June, while the Nasdaq 100 has dipped into the red.
At the very beginning of the year, I told you every shred of evidence I have collected is pointing to an extended surge in smaller stocks. The choppy, sideways action in the Russell didn't sway our longer-term thesis. Now that we’re beginning to see some follow-through, it's time to start taking these small stocks seriously once again.
This action is exactly how big changes in trend happen. One second, everyone hates small-caps. Just when the last seller leaves the building, a monster rally begins to take shape. It happened in November -- and it could happen again this summer.
Ideally, the tech leaders from the first half of the year will simply trade in a sideways range to digest their gains. That's healthy market action. Remember, no stock can climb higher in perfectly straight line. Even the strongest trends need a break every once and a while.
But that also means the hot money will need a new target. Right now, small stocks are the perfect candidates to take the rally's baton as we barrel into the third quarter.
You should be more than ready for this dramatic market shift. We have continued to build our iShares Russell 2000 ETF (NYSE: IWM) position this month while reducing our exposure to the FAANGs and other big tech names that were so generous to us during the first and second quarters.
The market's changing before our eyes. Most investors will be caught off-guard if the big tech names continue to underperform. Don't be one of them. Pay attention to the signs of market rotation and you'll continue to rake in consistent gains this summer.
This article originally appeared on Daily Reckoning.