US Equity indices look to have shaken off the minor mid-week pullback attempt and are now beginning yet another leg higher, which should prove more broad-based in participation than what’s been seen in recent months. Breakouts in the Equal-weighted S&P 500 along with Russell 2000 on Friday are both conducive towards thinking that some mean reversion is taking hold in some of the formerly underperforming sectors. Meanwhile, some stalling out in Tech relative to the broader market is possible in the short run. However, I don’t expect this proves too long lasting before Technology starts to turn up again. Bottom line, Small-caps now look to be in the zone where they can begin to show some relative strength, and I expect that Equal-weighted S&P 500’s rally will continue. However, it’s difficult to say just yet that meaningful outperformance vs. Technology will occur.
As this chart shows below, the Equal-weighted S&P 500 ETF (RSP 0.08% -Invesco) has finally achieved its long-awaited breakout, which also happened in the Russell 2000 this week.
Thus, despite the underwhelming earnings out of the big Banks on Friday, the market was able to show a big breakout, thanks to good performance out of Consumer Discretionary, REITS, and to a lesser extent, Industrials and Materials. Equal-weighted Financials (RYF) still managed to rise +0.43% and this looks attractive given that Regional Banks (KRE -0.55% ) also rose to the highest levels since January. Thus, the laggard Regional Banks have now also broken out, and this should spur on outperformance from the Financials, even if the large-cap Banks lag temporarily.
Overall, while Healthcare has been a disappointment in recent months, it’s encouraging to see many formerly laggard sectors start to turn higher and show significant strength this week.
This keeps me bullish that a move to 5800 is very well possible, if not higher, and instead of seeing Technology fall and bring down the market (which is what the Consensus believed) at a time when many stocks were not participating, we’re likely going to see a broad-based rally.
S&P 500 Equal Weight ETF
Russell 2000 ETF (IWM- Ishares) has finally achieved its long-awaited breakout
This week finally brought about the long-awaited period of outperformance for Small-caps which many have been expecting could happen for months.
This weekly chart of IWM shows the absolute breakout in IWM above $210 that arguably should kick off a rally in the weeks to come.
Thus, a period of catch-up looks to be getting underway and I expect Small and Mid-caps to both show strength between now and early September. Mid-cap ETF MDY -0.03% (SPDR Mid-cap Series) has not yet achieved the same progress as IWM did on Friday. However, this looks imminent and might happen next week.
Initial upside targets for IWM lie near $223 but a larger push higher to test 2021 highs is very possible, and that would put IWM near $242-3 before any stalling out. Overall, this is bullish for IWM and I expect further gains in the weeks to come.
Russell 2000 ETF
IWM vs SPY has begun to lift; However, no breakout is yet apparent and more progress is needed before calling for Small-caps to outperform Large-caps
The liftoff in Small-caps on Thursday proved to be the third-strongest gain relative to Large-caps since 2000. Historically, the prior occasions when this happened such as 10/11 and 3/20 both kicked off above-average periods of outperformance for Small-caps.
In this case, more needs to happen to make the case that Small-caps will outperform Large-caps. However, any break in this relative downtrend (which is now being tested) should help IWM’s relative strength begin to accelerate in the weeks ahead.
I feel that the breakdown in Dollar and Yields this week proved important in making September a much more likely month for the start of Rate cuts. This in turn provided a spark to the Small-cap trade which had been missing in recent weeks.
While I am optimistic about the path for Small-caps on an absolute basis given this week’s progress, I’ll be even more enthusiastic about the potential for Small-caps relative to Large-caps once this downtrend is broken. This very well could happen early next week and will add conviction to the idea that Small-cap outperformance has arrived.
Russell 2000 ETF / S&P 500 ETF
Equal-weighted Technology could stall out briefly vs. Broader market in the short run
This ratio chart of Equal-weighted Technology vs. Equal-weighted S&P 500 sheds some light on another interesting development that’s happening at the same time as the Equal-weighted S&P 500 has broken out.
Weekly charts of RSPT to RSP show a TD Sell Setup, following a very steep three-month period of outperformance (as part of a larger period of outperformance for Technology since last Year).
These signals represent nine consecutive weekly closes where the close was above the close from four weeks prior. In plain English, when signals of this sort happen, the trend normally shows some slowdown and consolidation and occasionally a larger reversal.
In this case, I take this to mean that Technology could be stalling out vs. the broader market in the weeks ahead. Thus, this doesn’t mean that Technology stocks should peak out and/or should begin any sort of correction. However, it does point to a good likelihood of a broader market rally where other sectors might show better performance than Tech in the weeks to come.
S&P 500 Equal-Weight Technology ETF / S&P 500 Equal-Weight ETF
