OBSERVATIONS: ONE NOT SO RECENT, ONE RECENT

 

NOT-SO-RECENT OBSERVATION

The financial airwaves have spent a lot of time over the past few weeks discussing the poor performance of the Technology complex, and specifically the "F-A-N-G" stocks (Facebook, Amazon, Netflix and Alphabet, formerly known as Google). I find this humorous, because as far back as June, and most recently August, we discussed what we believed was a "top of yet-to-be-determined duration" for many parts of the Technology complex and recommended "reviewing equity positions… while tightening stop-loss points."

Since early June, as shown in the table below, a number of segments in the Technology complex have underperformed the S&P 500, DJIA and Russell 2000 Small Cap Index. Their "relative strength" top remains in place. Let me please suggest again, "review technology positions, discern your risk tolerance levels on both an absolute and relative basis, and tighten stop-loss points."

2017.09.27-perfomance-table.png

RECENT OBSERVATION

As September and the third quarter of the year come to an end, a significant "tactical question" has been on my mind: will the performance gap between Small Caps and Large Caps, which currently favors Large Caps by between 5% and 7% depending on how you measure the gap, finally narrow as we move towards year-end?

While there are many economic and fundamental answers to this question, from my point of view, I would say, "yes, the odds favor that this performance gap narrows and Small Caps play 'catch up' to their Large Cap brethren."

My reasoning is as follows: The U.S. Dollar Index Bullish Fund (UUP/$24.15) completed a short-term bottom and closed above its 50-DMA. Additionally, it was reported that CFTC net positioning in the U.S. Dollar has shifted to being net short. Both of these factors favor some type of short-term rally by the U.S. Dollar, which may act as a tailwind for the Small Caps into year-end. Finally, from a relative strength perspective, the Russell 2000 moved above a downtrend line when measured against the S&P 500 and the Russell 1000 (Large Cap) Index—chart below.

Rising Line: Small Caps are leading Large Caps

KEY LEVELS

S&P 500 (SPX/2496.84) – Support [level(s) where buying interest exists]: 2480, 2460 and 2446. Resistance [level(s) where selling pressure exists]: 2509, 2513 is considered "overbought" as measured by an upper Bollinger Band. 2535 is a target price based on a previous base breakout. 

Russell 2000 (RUT/1456.86) – Tactical support: 1450, 1440 and 1430 +/-, none of which is a major level, and 1415. Resistance: 1467 is considered "overbought" as measured by an upper Bollinger Band.

Have a wonderful rest of your week. Please know that Day Hagan Asset Management appreciates your support and hard work!

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 9.26.2017. Chart sources: Stockcharts.com.

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