The narrative in the business media is that the market is struggling to make minor gains. With the S&P 500 off 0.3% and the Dow Jones Industrial Average down 0.5% this week that seems like a reasonable observation.
However, what a lot of folks are missing is that under the surface small-caps have been on a tear. The iShares Russell 2000 ETF (IWM) is up 1.1% so far this week and some sectors such as oil have gains of over 1.5%. One group that has had some very strong pockets of momentum have been small-cap biotechnology. I've mentioned many of those names recently such as my Stock of the Week, Arena Pharmaceuticals (ARNA) or Clearside Biomedical (CLSD) which I mentioned Thursday.
When well-known big cap names like Amazon (AMZN) and Facebook (FB) aren't powering higher and leading the major indices, it tends to confuse the media narrative. To the business media, the DJIA is the market. The 30 stocks that make up that index are viewed as the only thing that really matters.
For aggressive market players with a shorter-term time frame, the narrative has been quite different lately. It has been a very good market for stock-picking and there has been a very high level of speculative interest.
It can be easy to miss the strength in smaller stocks because the leadership is dispersed. It isn't concentrated in a readily identifiable group like FAANG names or large-cap semiconductors. Small-cap leadership shifts very quickly and even when a sector like biotechnology is doing well, the individual stocks that are moving will shift from day-to-day.
Because everyone is focusing on the big-cap indices rather than small-caps there is a tendency to view the technical conditions of the market in a different way. The small-cap indices are becoming quite extended and overbought but the S&P 500 and DJIA are consolidating in a fairly narrow range and doing nothing very remarkable other than holding some support levels.
It is two totally different markets when you compare the small-cap action to the big-cap indices. The big issue is how does that difference eventually reconcile itself? Over time stocks move in a correlated fashion and the gap in performance between the groups will narrow.
The bulls are hopeful that the continued strength in small-caps will help to pull the senior indices out of their lethargy and that some big cap leadership will emerge.
The bears argue that this small-cap leadership is what happens at a late stage in a bull market and is an indication that a top is occurring.
I'm not sure who is right but for now is see no choice but to stick with the small-cap action that is working. When that shifts, the character of the market will change and that will be the time to take more aggressive action.