The Deep Dive

Small Caps

Good morning!

In my review of the 4 corners of the Morningstar style box yesterday, both of the small-cap styles stood out and I wanted to make sure we dove deeper into smalls this week.

Small-cap growth stood out for its nearly year-long triangle pattern, which will soon reach its apex. That consolidation is happening right at the 2018-2020 highs, making the resolution all the more significant.

Small-cap value stood out for being the only part of the Morningstar style box to have retested its 2022 lows this year.

We have seen periods where large caps are able to buck the trend and move higher while small caps lag. However, this early in a “potential” new bull market, it would be nearly unprecedented to see small caps move on to new lows and not see the same for large.

So, this week we will review:

• Technicals for small-cap growth and value

• The absolute and relative set-up of the Russell 2000

• Small-cap breadth

• Technicals for the sectors within small caps

Let’s dive in!

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Small-cap styles

Small value retesting the October lows, trying for inverse H&S

Let’s start with the two charts that caught my eye when putting together yesterday’s Playbook. Small-cap value gained 1.2% yesterday, but it needs to clear $138 to complete the inverse head and shoulders pattern. And most importantly, we don’t want to see it break the 2022 lows.

Short-term, small-growth needs to make a one-month high

Small growth also gained 1.2% on Monday, but that failed to even clear its Friday high. IWO needs to clear $129 this week or else we risk breaking the uptrend line that goes back to its summer lows.

Big-picture, the small growth resolution looks really important

One more here, but zooming out makes it clear that uptrend line for small growth is really important. This is arguably one huge triangle consolidating right at the 2018-2020 highs. Which way this breaks could offer a huge clue to the broader market’s next 20% move.

Small growth > small value