Breakouts and Breadth Expansion

From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge

Last week, we pointed out some mixed signals in our breadth indicators. 

Despite the new highs from almost all the large-cap major averages, we had yet to see new highs in their corresponding advance-decline lines.

We also hadn’t experienced the kind of expansion in participation that we’d expect to accompany the indexes to new price highs.

Our new high indicators were still muted, even on shorter timeframes.

But that was last week. This week, mid-caps and small-caps have joined their large-cap peers at new record highs after making decisive upside resolutions from their year-to-date ranges.

And guess what? We’re finally getting that breadth confirmation we were missing.

Let’s talk about it.

First, here’s a quick update on the advance-decline lines that we covered in last week's column:

In the handful of days since we wrote that post, we’ve gotten new highs from the large-cap A/D line, the mid-cap A/D line, and the NYSE A/D line. We’re still waiting on confirmation from small-caps and the Nasdaq, but the weight of the evidence suggests we see new highs from them sooner rather than later.

We think everything is falling into place for small- and mid-caps to make fresh legs higher and start exerting some leadership relative to large-caps. 

New relative highs, bullish initiation readings from momentum, breadth expansion, and seasonal tailwinds. That’s what we’re seeing from SMIDs right now. The bottom line: We’re buying these new highs.

Here’s a look at the percent of new 21- and 63-day highs in the S&P 600 and the S&P 400:

As you can see, short-term new highs for small and mid-caps have been expanding as the indexes rally to fresh highs. In fact, this is the most new highs we’ve seen in over seven months from SMIDs. 

This is the kind of confirmation from internals that bulls want to see accompany new highs at the index level.

Small-caps have an exceptional track record in November. Looking out over the coming months, we feel that smaller stocks have the wind at their backs, and this would be a logical time and place for them to assert some leadership. Breadth is certainly supportive of it.

So, we still want to be buying stocks… just more of the little ones for now!

As always, please let us know what you think and/or reach out with any questions.

Premium Members, be sure to check out this week’s Breadth Report below...