In our February Conference Call we outlined the potential for some mean reversion in the Mid and Smallcap Indexes as they retested their 2018 lows, as well as the implications of a breadth and momentum improvement if we got it. We did, so let’s take a look and see what it means.
First let’s start off with the Nifty Free Float Smallcap 100 that recently undercut its 2018 lows. The thesis last month was that if this was a successful retest of the lows with far fewer stocks in the index making new lows, that would be a signal of massive breadth improvement. Well, those lows held and this bullish divergence is now confirmed.
Click on chart to enlarge view.
We’re also seeing that bullish divergence in the number of stocks within the Nifty Free Float Smallcap 100 Index hitting oversold conditions. Again, fewer stocks are seeing intense sell pressure as the index makes new lows, a very positive sign.
In addition to breadth divergences, we also saw a very large bullish momentum divergence on the weekly (and daily) chart of Smallcaps.
We’re not just seeing these improvements in Smallcaps, we’re seeing it in Midcaps as well. These were two huge weights on the market in 2018, but the evidence is building that a regime shift may be underway.
Breadth and momentum divergences of this magnitude are often the type we see at sustainable long-term bottoms. While this is not an all clear, go out and buy everything hand over fist signal like we got in November, it is a more structural improvement that we need to acknowledge.
What it tells us is that we now have the foundation for this market to build a long-term bottom upon.
Thanks for reading and let us know if you have any questions!