From the desk of Steve Strazza @Sstrazza
Small-Caps have been outperforming the large-cap indexes by a mile so far this year.
Since January 1st, the S&P Small-Cap 600 is up roughly 25%, compared with just a 5% gain for the S&P 500, and 0% for the Nasdaq 100.
This leadership is showing no signs of slowing, as they once again led the market back to fresh all-time highs this week after a brief and shallow reset.
Not only has the momentum behind this move been astounding, but the S&P Small-Cap 600 just experienced another significant breadth thrust, this time in its percentage of new 52-week highs.
Let’s take a quick look at these developments and what they mean for the group going forward.
It’s no secret that small-cap stocks have been on an absolute tear since breaking out toward the end of last year.
Despite all the calls of being “due for a pullback” or the trend being “overextended,” they’ve continued to grind higher with impressive resilience.
The Relative Strength Index is one of our favorite tools over here at Allstar Charts, and we actually love buying charts that consistently register overbought readings.
Since we’re always focused on the leaders, we’ve become used to seeing charts remain overbought for extended periods of time.
This kind of momentum is simply a characteristic of the strongest uptrends… and it’s something the S&P 600 $IJR has been doing since November of last year now!
This is a textbook example of a breakout and uptrend that is being supported and confirmed by strong momentum.
Another thing we look for when analyzing RSI is how well it holds up on pullbacks. The fact that momentum hasn’t fallen below 50 for about 4.5 months now is also very bullish and speaks to the strong demand underlying this rally in Small-Caps.
Not to mention, RSI has been in a bullish regime since early June of last year as it hasn’t been oversold on any pullbacks. This is another positive and is further evidence that buyers are most definitely in control.
Again, strong momentum and consistently overbought readings are not bearish… Instead, it’s quite the opposite as this is common bull market behavior.
Now for this week’s breadth thrusts. That’s right, we just had multiple historic readings… One to kick off the week on Monday, and another to close things out on a bullish note on Friday.
Here’s a look at the S&P 600 along with its percentage of new 52-week highs indicator in the bottom pane.
As you can see, over 30% of S&P 600 stocks made new 52-week highs on each of these days.
These are the most new highs we’ve seen since December 2016, as well as two of the highest readings over the past decade.
Although similar spikes have preceded short-term corrective action in the past, on balance these kinds of readings have marked a good place for long-term investors to be buying small-cap stocks.
As you can see in the chart, these initial thrusts have been followed by about 1.5-years of divergences before any meaningful selloffs occurred.
And if you look back to the zoomed-in chart of the new highs, you’ll see that we don’t have any divergence at all yet. It’s been all confirmation from this new highs indicator up until now.
In our opinion, this suggests the rally in small-caps that many think to be “overextended” is more likely just getting started.
The bottom line is that while these extreme momentum readings and breadth thrusts often do warrant near-term caution, when we look out over any significant time horizon, these are incredibly bullish signals and typically occur at excellent times to be buying stocks.
So, whether this indicates that we should be buying or selling stocks all depends on whether we’re looking out the next few days and weeks… or the next few months and quarters.
For investors like ourselves who are looking to make money this quarter, and aren’t too concerned with the day-to-day noise and volatility of markets, this is yet another piece of evidence suggesting we should remain aggressive buyers of stocks.
And, particularly the smaller ones!
Thanks for reading and please let us know if you have any questions.
For those of you interested in learning more about market breadth and Technical Analysis, I encourage you to check out our Charting School.