IWM AND IJR SCORE NEW HIGHS -- FINANCIALS LEAD SMALL-CAPS HIGHER -- SMALL AND MID CAP AD LINES LEAD -- SECTOR AD LINES SHOW BROAD STRENGTH -- UTILITIES AND FINANCE LEAD HIGH-LOW RANKING
IWM AND IJR SCORE NEW HIGHS... Link for today's video. Barring a big plunge the next few days, small-caps are going out with a bang this year. Small-caps lagged the broader market throughout 2014 because the Russell 2000 iShares (IWM) and the S&P SmallCap iShares (IJR) traded flat the entire year. As charts 1 and 2 show, these flat trading ranges amount to consolidations after extended advances and could simply mark a rest within the bigger uptrend. This means the recent breakouts signal a continuation of the prior advance and resumption of the bigger uptrend. Any way you slice it, both IJR and IWM forged fresh 52-week highs and new highs are bullish. The indicator windows show the price relatives forming higher lows in November and turning up in December. These are the early signs of relative strength in small-caps.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
FINANCIALS LEAD SMALL-CAPS HIGHER... Chartists watching small-caps should also keep an eye on the financial services sector because it is the single biggest sector in the Russell 2000 (24.22%) and the S&P Small-Cap 600 (23.57%). There are two ways to do this. First, there is the SmallCap Financials ETF (PSCF), which is based on the financial stocks in the S&P Small-Cap 600. Second, there is the Regional Bank SPDR (KRE), which is based on smaller banks and includes many small-caps. Chart 3 shows PSCF breaking to new highs in late October, consolidating for a few weeks and continuing higher with a surge above 41. With fresh 52-week highs, this ETF is clearly in an uptrend and helping small-caps. Chart 4 shows KRE breaking a wedge trend line, consolidating around 40 and then breaking higher the last two weeks. Those looking for a reason can point to the surge in short-term Treasury yields. The indicator windows show the 2-year Treasury Yield ($UST2Y) almost doubling from early October to late December.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
SMALL AND MID CAP AD LINES LEAD ... The Santa Claus rally kicked in over the last seven trading days with five AD Lines hitting new highs. Chart 5 shows the AD Lines for the S&P 1500, S&P 500, S&P MidCap 400, S&P Small-Cap 600 and Nasdaq 100. The AD Line is a cumulative indicator of the percentage of net advances {(advances less declines) divided by total issues)}. The S&P 1500 AD Line represents the overall stock market and this key measure of internal strength hit a new high last week. Strength is across the board as the S&P 500, S&P MidCap 400 and S&P Small-Cap 600 AD Lines also broke out to new highs last week. These new highs reflect broad strength in the stock market and support the current uptrend. The Nasdaq 100 AD Line was the last to hit a new high, but finally joined the party on Friday. Chartists can use the December lows to mark key support for these indicators.
(click to view a live version of this chart)
Chart 5
SECTOR AD LINES SHOW BROAD STRENGTH... Chart 6 shows the AD Lines for the S&P 500 and the nine sector SPDRs. First, I would like to point out the green lines and higher lows from August to October. The AD Lines for the utilities, consumer discretionary, technology, finance and consumer staples sectors formed higher lows and showed relative strength during this period. In contrast, the AD Lines for the industrials, materials, consumer discretionary and energy sectors forged lower lows, which suggested relative weakness. Keep this in mind throughout 2015. If/when we get a broad market pullback, we want to look for AD Lines that hold up well and show relative strength. Second, it is worth noting that seven of the nine AD Lines hit new highs last week. The healthcare AD Line did not because of weakness in biotechs. The energy AD Line did not because it is the only one in a strong downtrend. With new highs in eight of the nine AD Lines this month, the stock market clearly shows broad strength. Note that Charts 6 and 7 were created StockCharts Pro Account because they have 10 symbols.
(click to view a live version of this chart)
Chart 6
UTILITIES AND FINANCE LEAD HIGH-LOW RANKING... As readers know, I like to rank the sectors using the High-Low Percent indicators and a moving average. I was using a 10-day SMA, but today will show a ranking with the 20-day EMA. The longer moving average will add more stability, while changing from a simple moving average to an exponential moving average will put more weight on the most recent values. Based on the 20-day EMA of High-Low Percent, the utilities sector is the strongest by far (+36.89%). This is hardly surprising because the Utilities SPDR (XLU) and Equal-weight Utilities ETF (RYU) both surged to new highs last week. The finance sector is distant second (+17%), while the consumer staples, consumer discretionary and healthcare sectors are in the +13% area. Even though these sectors are not keeping pace with utilities, they are by no means weak. The energy sector is the only one in negative territory and the only sector to be avoided from the long side right now.
