Small-Caps Surge Is Promising

 | Mar 08, 2018 | 6:00 AM EST
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spy

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IWM

Everyone seems so impressed that the market rallied back from the lows. Two months ago it would have rallied back from the lows and closed up 1% on the day. So something has changed.

Did you notice how many people finally noticed the small caps? Oh sure, it was hard not to notice them since they were mostly green all day, even when the S&P 500 was down about a percent. In fact everyone seems to have noticed the small caps now that they have rallied about 5% in the last five trading sessions. Well, you know there is nothing like price to change sentiment.

And what of the iShares Russell 2000 ETF  (IWM)  to SPDR S&P 500 ETF (SPY) chart that I have had here each day this week? It did break the downtrend line. And it did so like it meant it. The ratio is now trading at the highest level since Thanksgiving.

As a contrarian I will admit I don't like the fact that everyone now sees how great the small caps are. I don't like that yesterday no one cared about small caps and today everyone cares. Couple that with the fact that the equity put/call ratio has now been in the 50s for the third straight day, the longest streak since the end of January, as the market was making its highs.

And yet, the 30-day moving average of the advance/decline line is oversold, which perhaps accounts for the inability of the market to fall apart here. In fact, look at the numbers this indicator is dropping as we move forward. The next three days are "leaning" oversold but admittedly the red numbers are not that large. However you can see that beginning Tuesday the numbers get quite large.

Yet let me point out again that the S&P 500 remains below its 50 day moving average. Getting up and over that moving average while the window is still open will be key. Because if it uses up the oversold condition by opening down and closing flat then that moving average line becomes a problem overhead.

For now I think sentiment is slowly accepting the rally but is not yet too enthusiastic. I think breadth has done well and you already know I think the outperformance of the small caps is a positive. Therefore I will conclude with the same thing I have said for days. If the market comes down in the coming days we'll get oversold enough to rally again.

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