The big story of this market in recent weeks isn't the bounce in the major indices but how well small-caps have been performing. The Russell 2000 ETF (IWM) has bounced 4.62% over the last nine days compared to the Dow Jones Industrial Average, which is up 3.5% during the same period. But what is most interesting, is that the IWM has gained 2.5% over the last month while the S&P 500 has increased only 0.6%.
Individual stocks have been outperforming for weeks and that has driven the IWM to new all-time highs while the DJIA and the S&P 500 are not even close to their March highs, let alone the all-time highs in January.
Obviously, this underperformance is caused by pockets of weakness in bigger-cap names. Apple (AAPL) has been performing well but other big names such as Alphabet (GOOGL) , Caterpillar (CAT) , Goldman Sachs (GS) , 3M (MMM) , Verizon (VZ) and many more have been lagging.
In small-caps, the speculative biotechnology names and some of the mighty midgets are keep aggressive traders busy. I've been highlighting many of the movers in biotechnology lately such as my Stock of the Week, Arena Pharmaceuticals (ARNA) , and other favorites like Sarepta Therapetics (SRPT) and Rocket Pharmaceuticals (RCKT) .
This bifurcated market action makes it tough on timers. If you look at the S&P 500 or DJIA there are some solid technical reasons for being concerned, but if you look at the small-cap indices those arguments go out the window. The Nasdaq and Nasdaq 100 are somewhere in between the two and have the potential to make a run at their 2018 highs.
My game plan for dealing with this is to focus on trading the strength in the small-caps and not to worry much about the timing of the senior indices. The bearish spin on this small-cap outperformance is that it is late-stage action. The speculation is what occurs near the top, similar to what we saw back in 2000 when the Nasdaq and internet stocks had a final frenzy before a major top occurred.
Perhaps, but the bullish argument is that it is impossible to time a turn here. We simply have to ride the wave as long as we can and watch for a shift in the price action. It is becoming much harder to find good entry points after this run but the price action is healthy.
Ironically, the underperformance by the indices probably helps to create a "wall of worry" effect. While the S&P 500 offers reasons to worry, many stocks are still running so there is a tendency to keep putting capital to work to avoid missing out. Higher interest rates also contribute to this wall of worry effect.
We have another very mild start Thursday morning. I'll be managing positions closely and protecting gains. The hunt for new ideas is becoming more difficult but there isn't any reason to be aggressively negative.