The Bear Case Starts With Small-caps

JC Parets
September 3, 2020

It's been a monster run since March for equities, especially in the United States. Rotation, breadth expansion, momentum thrusts, all the works.

So what's going to stop this train? The opposite of those things, most likely.

I think the bear case starts with small-caps. I was taught to dance with the girl who brought me to the dance. Small-caps were one of the key reasons why we got so bearish in early October 2018 and then again this year in early February 2020.

So why ignore them now? I say stick with that.

As we discussed last night on our Monthly Charts Strategy Session (Premium), if you're going to be shorting stocks and betting on the end, I think both Small-caps and Micro-caps need to be below their June highs:

Click on Chart to Zoom In

If these indexes are above their June highs, then I think putting on short positions makes little sense, and looking for stocks to buy makes more sense.

However, below that and I believe it presents a problem for the overall trend. Laggards, breaking down and dragging the market lower is characteristic of a market where we are usually being rewarded for selling stocks, not buying them.

As series of lower lows is NOT a characteristic of an uptrend.

So the way I see it, if $IWM is below 150 and $IWC is below 90, we want to be spending more time looking for short positions.

Let's see how we close out the week, but that's what's on my radar.

What do you think? Let us know!

JC

 

 

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