The S&P is at New Highs: Now What, Especially for Small Caps?
The major averages have recently been scoring new highs for the year, strongly hinting that the post-May correction has run its course. So where do we go from here? Is the market overbought and likely to digest recent gains, or is a rally into the bullish year-end period a better bet? Most of the indicators I follow are supporting the rally scenario. Let's start with the world and then move down to the US.
Actually, I should be saying "up" rather than "down" to the US, as Chart 1 shows the performance of the S&P Composite has reached a new high against the MSCI World Stock ETF (ACWI). In doing so, it has completed a nearly 2-year inverse head-and-shoulders pattern, which suggests that the trend of superior US relative performance will extend for a while. Moreover, if we can make the case for stronger global equities, that should speak to an even better performance for the US.
The Global Picture
Chart 2 compares the ACWI to my Global Diffusion indicator, which monitors a universe of country ETFs in a positive trend. We know that it is bullishly positioned above its 10-day MA. What we do not know is how long it will remain there. Since the indicator is only just starting to cross above zero, it is leaving plenty of upside potential before experiencing an overbought reading.
Chart 3 is derived from a similar universe, but this time it is calculated from net new highs based on a 40-day lookback period. Again, we do not know how long the November first buy signal will remain in force, but its relatively subdued reading suggests that that it will be there for a while.
US Internal Indicators
Chart 4 features an indicator based on the number of NYSE stocks above their 50-day MAs. This series, or rather its 10-day MA (plotted in black), peaked way back in June of last year. Notwithstanding the late 2020 rally, it has been correcting ever since. At one point, 40% of NYSE issues were trading below their 50-day MAs. That represents a healthy intermediate correction in an ongoing bull market. Now, the indicator appears to have reversed its downward trajectory, as it has completed a double bottom. Three previous setups since 2017 were all followed by a rally of some kind. Two instances, like the current one, were associated with a positive divergence, where the Index registered a new low but the indicator did not. Currently, the indicator is trying to edge through its 2021 down trendline. A more decisive break would substantially increase the odds of higher prices.
That seems likely, since the number of Dow stocks sporting positive silver crosses has started to rally (Chart 5). A silver cross is positive when the 20-day EMA of an individual Dow component is above its 50-day EMA. The arrows show when the indicator drops below 50% and then crosses above its 20-day MA. Typically, the DJIA itself rallies following such an event; the latest signal was triggered a few sessions ago. The indicator remains in a subdued mode, which is good. More importantly, the break above the May/November down trendline suggests that both it and the 50-day series shown in Chart 4 are headed higher.
Small Caps Breaking Out
One of the beneficiaries of the post-correction rally has been small caps, in the form of the Russell 2K ETF (IWM). The price (Chart 6) has recently broken out from an eight-month consolidation. This has been supported by a positive daily KST. Note how the 50- and 200-day MAs are trading very closely together and are almost flat. Usually, this type of action indicates a tight balance between buyers and sellers. When resolved, such a setup is often followed by a very sharp advance.
One indicator (Chart 7) that is starting to look prescient is the Special Kbased on hourly data, as it has clearly completed its post-March corrective period and is moving in complete sympathy with the price.
Its RS line, in Chart 8, has violated the down trendline emanating from last March. However, the real challenge lies at the dashed horizontal line, as a move above that would serve as a nice complement to the price breakout in Chart 6.
Finally, Chart 9 shows that the silver cross indicator for the S&P 600 Small Cap Index ($SML) has crossed above its MA and the 2021 down trendline, thereby suggesting that the expected advance will gradually broaden.
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.
