TRANSPORTS AND SMALL CAP INDEXES CLEAR 200-DAY AVERAGES -- TODAY IS REBALANCING DAY FOR RUSSELL INDEXES -- FINANCIALS ARE THE DAY'S STRONGEST SECTOR AND MAY BE BOOSTING SMALL CAPS -- BIG BANKS PASS ANNUAL STRESS TEST AND ARE LEADING XLF HIGHER
TRANSPORTS CLEAR 200-DAY AVERAGE...Two market groups that have been market laggards all year are suddenly attracting new buying. I'm referring to small cap stocks and transports. Chart 1 shows the Dow Jones Transportation Average ending the week above its 200-day moving average. It's also one of the day's strongest groups. The gray area is a ratio of the transports divided by the Dow Industrials and has been dropping for most of the year. That has worried Dow Theorists who like to see both Dow Averages rising together. This week's upward spike in the ratio is an encouraging sign for both.
SMALL CAP INDEXES ALSO CLEAR THEIR 200-DAY LINES...My Tuesday message showed small caps underperforming larger stocks for most of the past year. That may be changing for the better. Small caps are also ending the week on a strong note, both on an absolute and relative basis. Chart 2 shows the Russell 2000 Small Cap Index (RUT) surging late in the week to clear both moving moving average lines in pretty decisive fashion. The gray histogram bars show the RUT/S&P 500 ratio spiking upward as well. Some of that trading might be attributed to the fact that the Russell indexes undergo their annual rebalancing today. That usually leads to heavy trading in all of them. And could be distorting some of their price action.
Chart 3, however, shows the S&P 600 Small Cap Index (SML) trading above its 200-day average as well. That suggests that today's upturn in smaller stocks could be for real. If it is, that would be positive sign for them and the rest of the market. A strong end of week rally in financial stocks may be adding to the upturn in small caps.
BANKS LEAD FINANCIALS HIGHER... My Tuesday message pointed out that financials were the biggest sector in the Russell 2000, and have a big influence on its performance. So far this year, weak financials have been a drag on small stocks. Not this week. A strong upturn in financials on Friday may be giving a big boost to smaller stocks. Chart 4 shows the Financial Select SPDR (XLF) surging today to the highest level in nearly two months. It's also the day's strongest sector. The histogram bars show its relative strength ratio also jumping. And it's being led higher by banks for a change.
Chart 5 shows the KBW Bank Index ending the day nearly 2% higher today to lead financials higher. And it closed just north of its 200-day average. Banks are the largest part of the XLF but have been among its weakest performers. Until today. The histogram bars show its relative strength ratio climbing as well. One possible reason for today's strong performance may be banks passing their annual stress test this week; which is often followed by increases in their dividend payouts and share buybacks. That may explain strong gains in big banks like Bank of America, Citigroup, Goldman Sachs, and JP Morgan.
