Overtime

SMids + small-cap sectors

Good morning,

Small-caps are all the rage and finally outperforming large over the past few weeks. But is it sustainable? Today we’ll take a closer look at small-caps (and their slightly larger mid-cap brethren) by breaking down small-caps from the sector level.

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Top-down technicals for small-caps

IWM: Russell 2000 ETF

Zooming in from yesterday’s Playbook chart, the Russell 2000 has now spent 3 days suspended just below resistance. We really need to see a strong close above $200 here to say the ETF has broken out, while any downward movement ($195.95 was Friday’s low) risks a gap fill. However, whenever we can break out, the measured target is $235.

IWM vs. SPY

Small-caps outperformed large by 9.6% from November 10 through last Thursday. That’s a solid surge but we have to respect that the trend still favors large. The IWM:SPY ratio is back above broken support, but running into a downward-sloping 200-DMA. As someone benchmarked to the S&P 500, I would prefer to focus on leadership groups within small-caps, as a broad allocation just isn’t supported by technical trends yet.

Breadth

Small caps may be pulling back at the top of their range, but breadth leads price and the new high data says the Russell will break through. An astounding 47% of the index traded to a new 3-month high last Thursday (the 5th highest reading on record since 1990) and the percent of components above their 50-DMA just hit the highest level since the bear market started.

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Top-down technicals for mid-caps

SPMD: S&P 400 Mid Cap ETF

Mid-caps gapped up and through resistance last week, but are pulling back the last 2 trading days. Ideally, $48 would hold, but the unfilled gap lurks just below ($47.50). I think we should focus on the 52-week high and the strong internals, but extreme overbought conditions and some excessive optimism could make this messy.