Why Small Cap Stocks Are Outperforming

 | Mar 07, 2018 | 7:51 AM EST
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Tuesday's market saw more of the same that we saw on Monday. The breadth was good once again. The small caps outperformed the large caps again (more on that below). The big change was a shift in sentiment.

For the first time since the highs in late January we saw two consecutive days with the equity put/call ratio under 60%. That's not a huge negative but to me it shows an acceptance of the rally that wasn't there a month ago, three weeks ago, or even two weeks ago. So it's a shift in sentiment that I see, and one that is bothersome; I much preferred it when folks were buying puts into rallies, not calls. Yesterday I said a down day on Tuesday would likely see the put/call ratio head back up but we did not get a down day and the acceptance of the rally increased.

However, the ratio of the iShares Russell 2000 Index ETF  (IWM) to the SPDR S&P 500 ETF (SPY) went up nicely again but stopped right at the downtrend line. This downtrend has been in place since October so a failure to get over the line keeps the downtrend in play.

It's bullish that the small caps have been outperforming. It's bullish that the Russell has been leading. It's bullish that breadth has been good. But take a look at IWM on its own and we see it stopped right at resistance. So the ratio couldn't get through nor could the actual index.

Thus I want to revisit the discussion about the 50-day moving average lines that we had yesterday. The S&P 500 has rallied three straight days and still it is not at or over the 50 day moving average line. Remember, there is a window for it to push up and over this area and that window is the next two weeks. If it can't do it by then, then those moving average lines will roll over and a declining moving average line is much more resistance than a rising or flat one.

The McClellan Summation Index is still struggling to push upward in a meaningful way but it is still moving upward. It will now take a net differential of -1800 advancers minus decliners to turn it back down so there is some cushion there.

I suspect if we come down in the next few days we'll see us back to an oversold condition. This market has not had a proper trend in place for six weeks, as each move up and down has lasted about a week. I also think that if the market comes back down we'll see sentiment turn bearish in a hurry. That's the kind of market we're in, still highly emotional.


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