Small-Caps Survive Market Slide, So They're Up for Some Exercise

 | Aug 24, 2017 | 6:00 AM EDT
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At least we didn't hear the chorus singing "full steam ahead" on Wednesday since the S&P 500 gave up about one-third of its gains from Tuesday. The main difference was that the small-caps and the breadth did not deteriorate -- a change! -- but the transports kept going lower.

Speaking of small-caps, let's do a similar exercise today to the one we did yesterday, when we did an exercise on the Semiconductor Index (SOX), using the 50- and 200-day moving average lines. The same exercise on the moving average lines of the Russell is interesting as well. As a reminder, I take the spread between the two moving average lines and plot the daily change. When the daily change gets too extreme (in this case -2 or worse) it's oversold.

Here's the chart with the green line (oversold) at -2.

It turns out to have a similar outcome. The massive push under that oversold line tends not to be the low. There were two exceptions -- June 2012 and the election last year. In 2010, the rally lasted a day and a half (green arrow) before it fell again. Even the early July lows were retested two months later in August.

In 2011, the rally lasted a few weeks, but once it peaked it barely even took a breather at the previous low (green arrow).

In 2012, the rally lasted about a month and the retest only came back about halfway. This incident was clearly different.

In 2014, there was a two-day rally and a move back down to undercut the low and then the Russell embarked on a rather extended rally, nearly two months, before retreating to a lower low months later.

In 2015, the initial move under -2 arrived (green arrow) and it took two more days of selling to even get a bounce. The bounce lasted a few weeks and then made a lower low and a multimonth rally, only to come down again. The green arrow in January 2016 saw a one-day bounce, a lower low and that was it.

Finally, on Nov. 1 last year, it again moved to an oversold condition, fell two more days and then took off and has not revisited this level at all, although it has been a laggard this year.

To me, there are a few common themes in this particular exercise that we did not see with the SOX yesterday. The Russell seems to do this almost yearly; since 2009 the only exception was 2013. I'd call that seasonal, wouldn't you? It also tends to do this sometime in the period of May to November. Longtime market watchers might recall that the best six months of the year for the small-caps tend to be November through March/April. This -- at least to me -- is a great example of that seasonality that really seems to apply. It also seems to confirm my view that we should come back down again once this oversold condition is relieved.

At this point, I expect the current oversold condition to be relieved by late this week/early next week.

For more market analysis from Helene Meisler, sign up for Top Stocks, published five times a week. 

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