For the First Time in Three Years, Small Caps are Starting to Look Interesting

• Russell 2K at a Record High
• Some Small-Cap Sector ETFs Breaking as Well

Russell 2K at a Record High

Small-caps have been underperforming since early 2018, but, in the last few weeks, have begun to emerge as relative outperformers. We can see this from Chart 1, where the iShares Russell 2000 is compared to the S&P Composite (IWM/&SPX). This relationship broke down from a 9-year top earlier in the year, which suggests that a more extensive relative bear market for low-cap stocks has yet to unfold. On the other hand, the RS line has rallied above its 12-month MA and bear market trendline, thereby hinting that this relative bear market might be over. We will not really know until that red trendline joining the 2010, 2012, 2016 and 2019 lows is surpassed by a month-end close. In the meantime, there are some encouraging signs from both the IWM price and the consensus of small-cap ETF sector action.

Chart 2, for instance, demonstrates that the IWM has just cleared its 2018-2020 resistance trendline and is currently trading at a new all-time high. This is being supported by long-term momentum in the second window, which has just moved above its 26-week EMA. Relative action has also begun to improve, with a joint trendline breakout and a buy signal for the long-term KST for relative action. This is featured in the lower two panels. These KST reversals are important because they do not take place that often and, therefore, have longer-term significance.

Some Small Cap Sectors Breaking as Well

Invesco has a family of ETFs dedicated to small-cap sectors, several of which are at new highs. Chart 3, for instance, shows that the Consumer Staples ETF (PSCC) has recently moved back above its 2018 high, as it completed a large inverse head-and-shoulders formation. This action has also been supported by the relative line, which is now above its bear market down trendline.

Consumer Cyclicals or Discretionary have achieved a similar result, though the RS breakout is more impressive. That's because the bear market trendline has been touched or approached on more occasions, is slightly longer and has a lower angle of descent. Finally, the long-term KST for relative action is in a stronger uptrend than that for Staples.

Moving on to Chart 5, we find that the Small Cap Healthcare has also achieved new all-time high status, just as the long-term KST has gone bullish. Relative action has also completed a base and looks to be headed higher.

Small Cap Materials (PSCM) are not yet at new all-time highs, but the breakout above the 2018-2020 resistance trendline is nonetheless impressive. The down trendline for relative action is right at its 65-week EMA; we know that because the EMA can barely be seen. These two measures of dynamic resistance reinforce each other, which means that their joint violation is quite significant. Note the example for the price and relative action in late 2019, when the joint breakout was on the downside. Those penetrations were followed by a major drop. The recent buy signal for the relative KST adds even more bullish evidence to the recent upside breakout.

Chart 7 features the Invesco Small Cap Financials, a sector which has recently broken out from a post-March base and crossed above its 65-week EMA. This sector has definitely been lagging, as you can see from the failure of its long-term KST to go bullish. That may be about to change, as the RS line is currently right at important resistance in the form of the EMA and April/November resistance trendline. However, it's not yet getting any support from the RS KST. If it is able to complete that potential base, a trend of superior relative action would then be established.

Industrials, in the form of the PSCI, have tentatively broken to the upside. However, a bit more strength is required for confirmation, which seems likely since the long-term KST has already gone bullish. More to the point, the RS line has clearly broken above its down trendline.

The Invesco Technology Small Cap (PSCT) has just achieved a new all-time high and experienced a long-term KST buy signal. However, its relative line is facing an important test, as it is running up against the 2017-2020 resistance trendline. Due to its length and the number of rallies that it has turned back, I rate it as an important dynamic zone of resistance, implying that its penetration would have important technical significance.

Finally, Chart 10 tells us that the Invesco Small Cap Energy ETF (PSCE) is at a crucial technical juncture point, as the price and RS line are right at major down trendlines. Both KSTs are poised to cross their respective EMAs. Since we are currently at the point in the business cyclewhen commodities and commodity-sensitive sectors should begin to experience an improvement in their relative performance, an upside break is likely.

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.