Small-caps Lead the Way and Outperform Large-caps

The Russell 2000 ($RUT) is leading the market higher with a breakout on July 8th and a series of 52-week highs the last two weeks. This key small-cap index was one of the first of the major indices to break above its May high. Even though the index is looking a little overbought after a 10+ percent move the last 18 days, the breakout is clearly holding and bullish until proven otherwise. Should we see a pullback, broken resistance in the 1000 area turns into the first support zone to watch. The late June low marks long-term support. The indicator window shows the price relative ($RUT:$OEX ratio) moving to a new high as well. This means the Russell 2000 (small-caps) is outperforming the S&P 100 (large-caps). Relative strength in small-caps is positive for the market overall because smaller companies are more sensitive to changes in the economy. In addition, smaller companies tend to be more domestically oriented and relative strength bodes well for the US economic outlook.

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Good trading and good weekend!
--Arthur Hill CMT