Small cap, big trade

Although the past few days have seen small-cap stocks weaken compared to the rest of the market, the Russell 2000 (RUT) small-cap index has slightly outperformed the S&P 500 (SPX) over the past year—thanks mostly to a relatively recent burst of strength. So far this year, the RUT has gained more than three times as much as the SPX, roughly 7.5% vs. 2%.

The principle that “a rising tide lifts all boats” could appear to explain some of the activity in Darling Ingredients (DAR) over the past few months. The company, which turns food waste and animal by-products into everything from pet food to fuel, lives in two worlds: By virtue of its business, it’s considered a consumer defensive stock, but it’s also a component of the RUT. Lately, though, it’s been trading more like a small-cap growth name than a traditional defensive stock.

On Tuesday morning, many traders likely noticed DAR because of its higher-than-usual call options activity—volume was more than 15 times put volume:

As the stock rallied more than 3% intraday to $43.81 in early trading, the most notable volume was roughly 5,300 contracts in the slightly out-of-the-money February $45 call—which also happened to have the highest open interest (OI) of any DAR option:

Rather than speculate in real time about whether this options activity had potentially bullish implications, long-time traders would likely wait until Wednesday’s OI total showed whether it represented more new positions (higher OI) than liquidations of existing ones (lower OI). With DAR’s earnings date still TBD but expected sometime in the first week or so of February, Tuesday’s activity might provide some insight into whether traders were increasing their positions or trimming them back.

And that information could have more meaning when viewed through the lens of the stock’s recent activity. On Tuesday morning, DAR was up roughly 19% for the year, and 44% from since October 13. But the monthly chart inset (March 2020–present) shows that even though the stock hit its highest level since May 2024 on Tuesday, the current rally has yet to make much of a dent in the downtrend that’s been in effect since late 2021:

Contrary to popular perception, rising or falling tides rarely lift or lower all boats. While it’s always helpful to understand the factors that may be generating tailwinds or headwinds for a certain sector or class of stocks at a particular time, it’s important to give stocks the individual analytical attention they deserve.

Also, in the markets, tides don’t follow predictable schedules—they can disappear and reappear without notice.

Today’s numbers include (all times ET): mortgage applications (7 a.m.), Durable Goods Orders (8:30 a.m.), EIA Petroleum Status Report (10:30 a.m.), FOMC interest rate announcement (2 p.m.).

Today’s earnings include: Automatic Data Processing (ADP), Amphenol (APH), Danaher (DHR), General Dynamics (GD), GE Vernova (GEV), Lennox (LII), Lam Research (LRCX), Meta (META), Microsoft (MSFT), Murphy Oil (MUR), Starbucks (SBUX), AT&T (T), Tesla (TSLA).

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