Small Cap Breadth Running out of Breath?

JC Parets
June 18, 2021

One of the most telling and obvious risk-on indicators would be the Nifty Small Cap 100 index. Why is that so?

Because when you look at a market rally, the longevity of that particular rally can be gauged by market participation. This is something that should be viewed closely. If a particular index is making new highs, how many stocks are contributing to that move?

Is it a handful? Is it a majority of the stocks? These are data points that will hint at the inherent sentiment of the move.

So let's take a look at what the Small Cap-100 new highs are telling us.

Breadth indicators are important to see the internal structure of a market move. We get valuable insights from what we see that can help us determine the strength of the trend.

First up let's take a look at the most immediate tactical view. Let's take a look at the % of stocks making new highs//lows over a 10-day period. What we find is that as the Small cap 100 index clocked new highs, the % of stocks making 10-day highs contracted. On the other hand, we got a minor expansion in the % of stocks making 10-day lows.

That is certainly not the trend you'd like to see. You'd want to see an expansion in highs and a contraction in lows.

But from a tactical perspective, the opposite seems to be playing out. This tells us that we need to be wary of the move until we get further confirmation of an expansion in highs.

Click on chart to enlarge view.

The next chart we'll look at is over a 21-day time frame. What do we have here? Curiously, the same trend appears to be playing out here. The percentage of stocks making 21-day highs has been contracting just as the small-cap index made a new high. That right there is a negative divergence.

The appearance of a negative divergence should be enough of a signal to be cautious. That's for sure.

What about the 63-day period? Any indications there? Well. let's take a look!

There is a minor contraction in the highs here too. So when three time-frames are hinting at a similar trend, there must be something to it, right?

In a bid to understand the sentiment better, we also did a check on the RSI overbought and oversold levels. Again, the percentage of stocks that are above the level of 70 had been declining as the small-cap index moved higher.

So what is the takeaway from this analysis? The small-cap index while rising, was not supported by a majority of the stocks. That is something we're uncomfortable with. Why is that? Because it would be positive only when the market participation is wider. Always. This is definitely something we're tracking.

It is important to note that these are short-term signals that are hinting at a not-so-strong move in the small caps. But one good day could bring about breadth thrusts that could alter the outlook.

What should be noted here is that existing positions should be tracked with more diligence. Risk management levels should be followed. That is the only strategy that will always keep you floating.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team

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