A few weeks back, as the market was zigging and zagging, I wrote about small cap action that caught my eye.
I noted that despite every media pundit and his dog preaching fear, the money was actually aggressively flowing into mid- and small-caps – not exactly the safe havens.
This observation was yet another data point to confirm my long thesis for the market, as it signaled a high appetite for risky assets.
As we all know, the market did turn out a good long at those levels…
It’s now time to talk about small caps once more, although for a slightly different reason.
We are not in the split market environment anymore.
The market and virtually every sector have resolved higher and confirmed the uptrend.
Nonetheless, we are still seeing a clear and continuous rotation down the market cap scale.
This is illustrated very well by the price action of size-based indices.
Take a look below:
Large Caps are the only group not in the clear yet, as they’re still battling their September resistance.
Meanwhile, Micro- and Small-Caps have all moved higher and are beginning to accelerate.
This is not just a signal of broader market strength anymore.
Smaller stocks are showing obvious relative strength and could be making a statement about themselves.
Russel 2000 – the small cap index, paints a similar picture when plotted against SPY:
Now, I will admit, this does look a bit extended near-term… IWM might need a pull-back from that resistance before it pushes through.
That said, it is definitely a breakout from the lows and it’s very consistent with a structural bear-to-bull reversal.
Will Small Caps Continue Outperforming?
There’s one more chart that I need you to see.
Below, I plotted IWM/SPY of the past 30 years and marked every time we’ve seen similar momentum surges:
Since the 80s, we’ve only had 12 rate of change readings as extreme as the one we’re seeing now.
10 of them were either at the onset or in the middle of a period of Small-Cap outperformance.
There aren’t many reasons to believe this time will be any different.
At the end of the day, it all comes down to what you choose.
You may listen to talkers and live life in constant fear.