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 absolute and relative trends at play and preview some of the things we’re watching in order to profit in the weeks and months ahead.
We continue to pound the table on leadership down the market-cap scale. There's been strong evidence over the past few weeks/months suggesting this is a structural trend reversal in the large vs small-cap ratio.
Many key indexes - both large and small, sit at crucial inflection points. Many of the small and mid-cap indexes are also extended and sporting extreme momentum readings, making for a logical level for sellers to step in.
It would be a healthy development for SMIDs to take a breather here and pass the baton back to large-caps for a bit.
The weight of the evidence suggests big-cap tech and growth are likely to lead equity markets higher while small-caps digest their recent gains over the near-term.
FICC markets also continue to suggest risk-on behavior. Check out our recent post where we look at some of the more obscure corners of these markets, all of which are signaling a positive bill of health for risk-appetite.
All-in-all, the weight of the evidence continues to suggest that we need to be buying, not selling stocks.
So with that said, let's jump right into last week's developments with our US index table.
Again, Micro-Caps $IWC, Small-Caps $IWM, and Mid-Caps $MDY all booked solid gains, extending their outperformance over the trailing month and quarter.
The historic momentum surges we've seen from these indexes recently portend short-term corrective action. That would be a welcomed development.
At the end of the day, it's all about identifying your time horizon because from a long-term perspective these readings are bullish and suggest we're in the early innings of a new uptrend.
The Nasdaq 100 $QQQ was the second-best gainer on the week. We expect it to reassert its leadership in the coming weeks and months as money rotates back into large-cap tech/growth.
Speaking of Growth - here's the Russell 2000 Growth ETF $IWO.
After an aggressive rally right through our target, some consolidation of the recent gains would be healthy to see here.
Just to be clear, this is a chart of small-cap growth.
Large-caps look quite different as the Russell 1000 Growth ETF $IWF has gone more or less nowhere for almost four months now. With that said, it just made fresh all-time highs this past week and finally looks ready for another leg up.
The same can be said for the Nasdaq 100 which is also breaking higher after consolidating in a similar fashion since September.
We always like to bet in favor of the primary trend. Mega-Cap Technology and Growth have been the secular leaders for many years, so we want to pay close attention to these areas and look for long opportunities now that they are breaking to fresh all-time highs.
We'll continue to weigh the data as it comes in each day but in terms of what this means for our bullish outlook on SMIDs and Micro-Caps... it doesn't have to mean anything. There is no rule that both groups can't outperform the broader market at the same time.
Furthermore, small-cap leadership doesn't have to mean growth is underperforming value either.
While many of these ratios have positive relationships, some things we know about historical relationships and correlations is that they are not only stronger/weaker at different times, but can also diverge for extended periods and even dissipate over time. A good technician is never dogmatic in his/her approach to intermarket analysis.
Now here's the Nasdaq 100 relative to Small-Caps.
With the ratio testing its key June low, and the Nasdaq just resolving higher on an absolute basis, this would be a logical time and place for the index to reassert some of that old leadership.
Regardless of how tactical these levels are, if this ratio were to rally back to the September highs, we're talking about 20% alpha in the Nasdaq relative to the Russell 2000 - that's not insignificant.
The reality is that small-caps have more than done their job of late. With six consecutive all-time weekly closing highs, bullish breadth and momentum thrusts, and an aggressive acceleration in outperformance over the trailing quarter... they need a break. We'll be watching to see if large-caps pick up their slack when they finally take that breather.
Moving now to our Sector ETF table.
Technology $XLK was the big winner of the week, closing up 3.18%. Technology and Growth is a big theme this week.
Check out the recent thrust in new highs for XLK in our recent post.
What made this development so special was not seeing it occur after a big-upward move, but rather during a sideways consolidation.
It's not often we see such strong underlying internals and thrusts during sideways moves, but when we do, they can only be viewed as strong support for the next leg higher.
Here's what we had to say about this in our Breadth post:
It’s also not often you see a breadth thrust or extreme reading in the midst of a consolidation. They tend to occur on big up days and short-term peaks. Well, not this time.
Seeing such a bullish new high reading was as good a signal as any that this multi-month continuation pattern was about to resolve higher.
Here's Equal-Weight Tech $RYT, which has been grinding higher and is on the verge of a relative breakout.
Technology, Consumer Discretionary, and Communications are all incredibly healthy under the surface, despite their Large-Cap ETFs not fully reflecting it. This has in part been assisted by the cooldown in Mega-Cap Tech/Growth names, which have a substantial weighting in all these indexes.
If and when these names ultimately resolve higher, which they look increasingly ready to do, that will do a lot in terms of driving these indexes to new heights.
With Google $GOOG already resolving to the upside, we're making the bet that these other Mega-Cap names will soon follow suit.
And from a market-cap perspective, Large-Cap Technology is at a key inflection point relative to Small-Cap Tech $PSCT.
This all rhymes with Large-Caps looking ready to carry the baton upward while giving Small-Caps time to digest their recent gains.
While our long-term outlook continues to favor SMIDs, again, this is another key level which warrants a more neutral view to Small-Caps in the short-term.
And for the rest of the sectors on our list...
There's no better breadth measure than going through the entire Russell 3000, and from our estimations, we're seeing more stocks resolve higher than lower.
In the case of Financials and Industrials, we're seeing multi-year and even multi-decade breakouts, evidence of new secular uptrends in stocks.
Let's move now to our Industry ETF table.
