Third-quarter earnings season begins Tuesday morning with reports from Citigroup (C) , JPMorgan Chase (JPM) , and Johnson & Johnson (JNJ) but the primary issue will be whether or not FATMAAN stocks continue their rampage higher.

The stock market action on Monday looked like the continuation of the uptrend that started back in March. The upward trend did continue, although there was a major shift as the Nasdaq regained its leadership and jumped 2.6%, which put it just 1% from the all-time high it hit on Sept. 2.

While it is difficult to find flaws with such robust price action, there were a few issues of concern. First, it was a narrower rally. Breadth was around 2 to 1 positive, which is good but not as strong as it had been when small-caps were leading last week. Second, the rally was driven in large part by just the seven stocks that comprise the FATMAAN group. Amazon (AMZN) , Apple (AAPL) , and Facebook (FB) all popped more than 4%. That isn’t just normal retail buying, however. It was likely the function of an aggressive option buying strategy that creates something called a “gamma squeeze,” which led to a similar rise in late August.

Positive price action of this sort has a very high likelihood of continuing. The problem, however, is that it also has a likelihood of ending abruptly. That is what we saw in early September when the Nasdaq 100 ETF (QQQ) dropped more than 5% following a day when it had hit a new all-time high and closed near the highs of the day. It is unusual to see that sort of sudden turn but when stocks are driven by manipulative strategies like a gamma squeeze there is a greater possibility.

While conditions are never exactly the same and it would be foolish to expect the same pattern to repeat, we need to be aware of how quickly things can shift when it is primarily the FATMAAN stocks that are running.

From a trading standpoint, the big issue to watch is the rotational action occurring as we head into earnings season. The reaction to the big banks Tuesday morning could produce more rotation into or out of “value” stocks but early indications show that the Nasdaq is going to continue its rally.

Small-caps have been the leaders over the last couple of weeks but they lagged Monday as the Nasdaq 100 QQQ jumped into the lead. I’ll be watching to see how this develops. I’m particularly interested in building up some positions in my favorite small-caps on weakness as we start to receive what should be some very good reports.

Johnson & Johnson (JNJ) is lower Tuesday morning on concerns about a health issue with a vaccine patient but this market remains focused on price action rather than news flow.

(Amazon, Apple, Facebook, Johnson & Johnson and JPMorgan Chase are holdings in Jim Cramer’s Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)

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