Chart Of The Day: U.S. Small Caps On The Cusp Of Retesting All-Time Highs?
Investing.com | Nov 27, 2019 06:52AM ET
Here’s why U.S. small caps are likely to outperform in the coming weeks and months.
Get The News You Want
Get The News You Want
Value seekers have been steadily increasing demands for U.S. small caps, taking advantage of lower valuations relative to large caps — which are showing the biggest difference in multiples in about 15 years.
Get The News You Want
Get The News You Want
As smaller caps are more speculative, they tend to get sold off first when concerns about economic recession arise. The recent advance in the Russell 2000 suggests these concerns are receding — as the U.S. and China are seen to strive for a trade resolution and the Fed continued to cut rates, along with its promise to go on supporting the economy.
Get The News You Want
Get The News You Want
Illustrating the market correlation between small caps and a looming recession, lower interest rates have consistently boosted small caps in the past 60 years. And, during those periods they gained 28% on average in the first year after the Fed started a rate cut cycle, almost double the 15% for large caps.
Get The News You Want
Get The News You Want
Perhaps, that is why the Russell 2000 has been outperforming on all major U.S. averages in the past three months, despite lagging on a YTD basis.
Get The News You Want
Get The News You Want
The Russell has advanced 6.6% so far in November, followed by the Nasdaq Composite's 4.3% rise and the Dow Jones Industrial Average increase of just under 4%. The S&P 500 index is trailing at just +3.45%, almost half the gain of the Russell.
Get The News You Want
Get The News You Want
However, when comparing YTD performance, the Russell 2000 still falls short, posting the smallest gains among the major American indices. It has climbed 20.45%, lagging behind the Dow’s 20.55%, the S&P's 25.35% and the 30.33% of the tech heavy Nasdaq.
Get The News You Want
Get The News You Want
In other words, the Russell 2000 is still undervalued relative to larger caps. Technicals, too, suggest a further rise.
Get The News You Want
Get The News You Want
Get The News You Want
Get The News You Want
The small cap index provided an upside breakout to a congestion with a downward bias since Nov. 5. The range is a falling, bullish flag. The downward tilt is important. It suggests that investors who have been carrying the load have had the opportunity to unload. The congestion — a tight trading range, with just a slight tilt rather than a drop — demonstrates that there has been demand absorbing the supply.
Get The News You Want
This is significant. It means there are new investors to take up the weight.
Get The News You Want
Get The News You Want
The upside breakout demonstrates that all supply has been absorbed, and bulls are prepared to pay higher prices. Since whoever wished to sell presumably did so during this period, the market is expected to be on the side of demand for the next leg. The expectation is that it will repeat the previous sharp uptake, 3.6%, top to bottom, in the four days — Oct. 31 through Nov. 5 — before the market took a breather.
Get The News You Want
Get The News You Want
The signals, however, are not coming from just a single technical phenomenon; there are other indications that provide corroborating evidence.
Get The News You Want
Get The News You Want
The 50 DMA crossed above the 200 DMA, triggering a so-called golden cross. It’s a potent one, considering that both MAs are pointing up, and demonstrates that the 50 DMA gained on a rising 200 DMA. This is much more meaningful than when it gains over a lagging 200 DMA.
Get The News You Want
Get The News You Want
The upside breakout also broke through a resistance since May 6. The gauge has not been able to climb above the 1620 level since it collapsed from its record highs in August 2018, establishing an uptrend since the December bottom. It is the only major U.S. benchmark not to have broken new record highs since. If investors continue to favor small caps, it may very well make new highs soon.
Get The News You Want
Get The News You Want
Trading Strategies
Conservative traders might prefer to wait for that new record, to sync the short-term uptrend with the long-term one.
Get The News You Want
Get The News You Want
Moderate traders may be content with a 2% penetration above the May 3 high to rely on the breakout.
Get The News You Want
Get The News You Want
Aggressive traders might want to wait for a pullback, so as not to get whipsawed out of their position.
Get The News You Want
Trade Sample:
Get The News You Want
Get The News You Want
Get The News You Want
Get The News You Want
Get The News You Want
Get The News You Want
Get The News You Want
Get The News You Want
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.