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CAPE 40 Warning: Small Caps and Defense Lead Market Rotation · The SPY Trader

• 0:00
  Welcome to Spy Trader .
• 0:02
  I'm your host , Mickey Moneybags , and it is 5 am on Friday , January 9th , 2026 , Pacific time .
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  We are heading into the trading day facing a highly mixed and cautious market as investors hold tight ahead of today's release of the December Employment Situation Report .
• 0:20
  It's a critical morning for setting the immediate tone .
• 0:24
  The market action tells a story of divergence and rotation .
• 0:28
  While the S&P 500 is essentially flat , hovering near alltime highs , the Nasdaq Composite is lagging , down nearly half a percent .
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  This indicates profittaking in the megacap tech names .
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  In contrast , the Dow Jones Industrial Average is posting a solid gain of over half a percent , suggesting strength in traditional bluechip value stocks .
• 0:53
  The strongest signal today comes from the smallcap Russell 2000 , which is up over one percent , leading the indices and suggesting a procyclical , or economic growth , rally is definitely picking up steam .
• 1:06
  This rotation is evident in sector performance .
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  Highgrowth , AIlinked tech companies like Nvidia , Micron Technology , and Broadcom are seeing weakness .
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  Leading the charge are cyclicals like Financials and Materials , and particularly Industrials .
• 1:23
  We have a huge catalyst in the defense subsector , where stocks like Lockheed Martin and Northrop Grumman are posting massive premarket gains , around 8% , following the news of a proposed 50% increase in the defense budget .
• 1:38
  On the macro front , the consensus for today’s jobs report is a modest 65,000 new jobs , continuing the lowhiring , lowfiring trend .
• 1:49
  The market is pricing in expectations for at least two Fed rate cuts in 2026 , which is driving this optimism outside of tech .
• 1:57
  But we must address the elephant in the room : the S&P 500's Cyclically Adjusted PricetoEarnings ratio recently hit 39.9 .
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  Historically , that level , last seen in the 2000 dotcom crash , signals a high risk environment and justifies caution .
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  Based on this analysis , we have four key recommendations .
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  First , participate in the broadening rally .
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  Since the Russell 2000 is leading , the rally is moving beyond just the Magnificent Seven .
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  Increase your allocation to the Vanguard Total Stock Market ETF ( VTI ) to capture all market caps , or target specific value strength with a stock like JPMorgan Chase .
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  Second , capture the highconviction defense catalyst .
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  The news of a massive defense budget increase is a concrete driver .
• 2:50
  We recommend focused exposure to pureplay defense companies like Lockheed Martin or use the Industrial Select Sector SPDR Fund ( XLI ) for broader industrials exposure .
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  Third , maintain exposure to longterm trends , but manage volatility .
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  The AI narrative remains intact , with companies like Alphabet nearing a 4 Trillion dollar market value .
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  For diversified tech exposure , keep holding the Invesco QQQ Trust ( QQQ).Finally , given the historically high CAPE valuation warning , it is crucial to introduce a portfolio hedge .
• 3:29
  For stability and yield , look to investmentgrade bonds using the Vanguard Total Bond Market ETF ( BND ) , or for a noncorrelated safe haven , consider a small position in SPDR Gold Shares ( GLD).That’s it for this edition of Spy Trader .
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  Trade smart , stay balanced , and we’ll catch you next time .