OVERVIEW
The Market Continues To Break New Ground

Yesterday's session was very strong, with all of the major indexes pushing higher and closing at new or near all-time highs. The small-cap sector led the way, posting its strongest close of the year, signaling strong momentum in that area of the market.

Despite ongoing concerns about potential tariffs, the overall outlook for the U.S. economy remains optimistic. Wall Street is taking a wait-and-see approach to Trump’s proposed tariffs on Mexico, Canada, and China, with many investors uncertain if these levies will be fully implemented. In the meantime, the market has been buoyed by favorable year-end seasonality and strong earnings reports, contributing to the recent gains.

A key factor driving this optimism is Trump’s recent appointment of Scott Bessent as Treasury Secretary. Bessent is viewed as a more moderate figure who could ease some of the president's more aggressive trade and fiscal policies, such as large deficits and high tariffs. This news helped lift the Dow Jones Industrial Average to new record highs and sparked a rally in Treasurys, pushing the yield on the 10-year note lower.

While concerns about tariffs, particularly with China, still linger, the market continues to rise, driven by expectations of tax cuts and regulatory rollbacks. These policies are seen as positive for economic growth, which has helped push stock indexes to new records. However, rising bond yields, which affect borrowing costs, are a point of concern as they could signal future inflation and impact the economy if interest rates rise further.

So, what does all of this mean for today’s session?

The fact that the market was able to brush off concerns about the potential tariffs is a major sign of strength. Gains were broad-based, with 9 out of 11 S&P 500 sectors finishing in the green, highlighting the widespread optimism across the market. Investors are clearly looking past the uncertainty surrounding trade policy, focusing instead on the broader positive economic factors, such as strong earnings reports and expectations of tax cuts and regulatory rollbacks.

As we head into today’s session, the momentum from yesterday's gains could carry over, particularly in sectors that have been benefiting from the optimistic market sentiment, like small cap, retail and consumer cyclical sectors.

Nasdaq

The Nasdaq had a strong session yesterday, despite closing in the red. Context is key here, as the index started the day gapping up into the $513 overhead supply zone, an area that typically doesn't lead to continuation higher. As we mentioned in yesterday's pre-market report, this level was likely to cause a rejection in the immediate short-term. Additionally, the gap left from the open was expected to be filled, and we saw that play out during the session.

On the positive side, the rising 10-EMA acted as support, which is a sign of strength. Looking ahead, the most likely scenario here is a sideways continuation, with a potential range developing along this daily 10-EMA between $513 and $504. This consolidation would set up the Nasdaq for a potential break higher next week, provided the support level holds.

S&P Midcap 400

The midcaps have been on a bit of a wild ride lately, experiencing a euphoric 6-day rally. However, yesterday, they faced rejection at the $624 level, with sellers stepping in as profit-taking took place. This led to an intraday retracement. A key point to note is the unfilled gap on the MDY between $612 and $620, which is now more likely to be filled, especially given the level of profit-taking observed late in the session.

Adding to this, the +7.5% extension from the rising 50-EMA is somewhat extreme, as such a move rarely happens without a short-term pullback. With the profit-taking and the gap left behind, it seems like a pullback or consolidation is in the cards for the near term, potentially filling that gap before any further upward movement.

Russell 2000

The small caps have been on a strong rally of their own, with a week-long surge pushing them to all-time highs. Yesterday, the Russell 2000 broke above $245, only to face significant profit-taking, which pushed the index to close in the bottom 25% of its trading range for the session.

Given this, we are expecting a continuation lower in the Russell 2000, with a likely gap fill and a move toward the Point of Control (POC) around $237. The most ideal and bullish scenario here would see the IWM form a volatility contraction pattern (VCP) or a bull flag over the next week. This consolidation would set the stage for another big leg higher, should the market resume its upward momentum.

DAILY FOCUS
Don’t Let Every Pullback Push You Around

The market remains very strong, and while we are likely to see a short-term pullback, it's important to remember that we are still in an uptrend. If this pullback does materialize, it should be viewed as an opportunity rather than a setback. Such a pause in the rally could lead to a healthy rotation, allowing stocks to set up and form strong entries for the next leg higher.

The market continues to show strength, and we remain positioned in stocks that are yielding open profits. Our strategy for today is to protect these gains by raising some of our stops and taking partial profits into the current strength we’re seeing. This approach ensures we lock in profits while managing risk as the market remains bullish.

As for new positions, we are likely to hold off on adding fresh exposure for now. With the potential for a short-term pullback, we want to wait for a more favorable setup or consolidation to form before committing to new trades. If the market pulls back, it could provide opportunities for rotation and stronger entries, but for now, we’re focused on managing existing positions and positioning ourselves for the next leg higher.

WATCHLIST
Setups Don’t Come Everyday

SMMT: Summit Therapeutics Inc.

• Healthcare has underperformed over the past month, but we’re now starting to see a resurgence of strength entering the sector. One standout name with a near "textbook" base is SMMT. This stock has been building a multi-month base since early September, and in the last week, we’ve seen a series of higher lows, signaling increasing buyer interest and potential for further upside.

• If the healthcare sector continues to gain momentum and climb higher, SMMT could be poised for one of the strongest breakouts in the theme. Given the stock’s solid base and the broader sector strength, it’s one to keep on your radar as a potential leader in the next leg higher for healthcare.