From the desk of Steve Strazza @Sstrazza and Louis Sykes @haumicharts
At the beginning of each week, we publish performance tables for a variety of different asset classes and categories along with commentary on each.
Looking at the past helps put the future into context. In this post, we review the relative strength trends at play and preview some of the things we’re watching in order to profit in the weeks and months ahead.
In last week's report, we outlined how the market was in an incredibly healthy state of order. We've been seeing rotation into SMIDS and Micro-Caps, strong breadth, and a sustained bid for Growth, particularly down the market-cap scale.
This week, we're harping on a similar theme.
The weight of the evidence, particularly from an intermediate and long-term time horizon, looks excellent.
But from a more short-term and tactical perspective, it would be healthy for many indexes down the market-cap scale to digest their gains. Many sector indexes and ratios are at key inflection points, so we'll be taking in the fresh data as we go to see just how strong the hands of buyers truly are.
Let's jump right into this week's report with our US index table.
Lots of green on this table as usual. The biggest takeaway of this section is all-time highs, and lots of them.
Let's take a look at the S&P 500 $SPY.
In order for the bull case to be wrong, a weekly close below the February highs would be a good start.
This means that the S&P 500 could still retrace 10% from current levels and have its uptrend remain intact.
And for Micro-Caps $IWC and SMIDs, it's the same story.
Micro-Caps have gone on to print a handful of consecutive bullish weekly candles. This is evidence of the very strong momentum pushing the index higher.
Here's what we mean.
Despite how extended Micro-Caps and SMIDS may look, the reality is they've gone nowhere for close to 18 months.
The key is that as long as we're above the 2018 highs in IWC, MDY, and IWM, the move higher in these indexes is just getting started despite how extended the move appears over the last month.
This kind of price action is historically something that occurs at the early stages of a bull market.
As for the Small to Large-Cap relationship, here's what we said about it two weeks ago:
Since the 1980s, we’ve only seen 12 monthly rate of change readings as extreme as the recent one. 10 of these incidences occurred at either the onset or during a period of Small-Cap outperformance.
Looking back through history, when these strong upward thrusts followed considerable declines like the one we just experienced, they’ve signaled exhaustion and marked key trend reversals. We don’t think this time will be any different.
It's all about identifying which time horizon you want to adopt.
So from a more tactical perspective, let's look at Small-Caps vs Large-Caps.
The ratio is quite clearly at an important level: not only is it at the 38.2% retracement of the 2014-2020 decline but also its key 2008 lows. Considering Small-Caps' near-vertical advance, this seems like a logical place for some deserved digestion of the recent gains.
It would make a lot of sense to see the ratio work off its recent gains here.
We'll be watching to see if price corrects through price or time, and for how long. Shorter consolidations and smaller drawdowns are typically evidence of stronger uptrends.
It may take days, weeks, or months for Small-Caps to try and push higher against their Large-Cap peers, and some near-term mean reversion is not just likely, but would be healthy.
As for our time horizon of multiple months and quarters, this looks to be a true relative trend reversal and we believe the bias is now higher in favor of Small-Caps.
Moving now to our Sector table.
We're seeing a similar story. Remember, this table only shows the Large-Cap ETFs.
Many Small-Cap sectors that have shown leadership since the beginning of November look extended from a short-term perspective, meanwhile, many Large-Caps areas are only now beginning to break out.
Take Large-Cap Technology $XLK, which after remaining dormant since the start of September, just had a strong week and looks ready to join the party.
While attention has shifted to other areas of the market for a change, this past week XLK quietly made its first all-time high in over two months.
Meanwhile, Small-Cap Tech $PSCT is now the furthest its ever been from its 50-Day Moving Average.
While we continue to like Small-Cap Growth-oriented areas (like PSCT), these groups remain historically elevated and it would be healthy to see some digestion of the recent gains.
Here's the chart.
If we step outside the realm of Growth and look at cyclicals, it's telling us the same story.
Small-Cap Materials $PSCM are also running into a likely place of overhead supply after a strong run-up. Also, note the potential divergence in momentum.
Ultimately, we'll need to evaluate the evidence as it comes in to see how supply and demand react to this key level, and whether this divergence is confirmed by price.
We continue to like SMIDS and Micro-Caps. The weight of the evidence continues to suggest that we should look to lean on them to express our bullish thesis on stocks.
However, in the short-term, it would make sense for many of these sectors down the market-cap scale to take a rest after such strong gains. We'd look for Large-Caps to play a little catch-up, but only over the short-term.
Moving now to our Industry ETF table.
You need to have a subscription to access this content in full.
