While I have highlighted the underperformance of Small Caps versus Large Caps since late June, a new obstacle has developed. Specifically, a short-term negative non-confirmation between the S&P 600 Small Cap Index (SML/1061.52) and the Small Cap Advance – Decline Line has occurred (chart below).


Market bottoms generally occur when a majority of stocks concurrently reach new 52-week lows as investor pessimism is spiking, often setting up a “V-type” or “W-type” bottom formation. Bull market tops, however, normally peak over a longer period as stocks and industries roll over a few at a time. An indication that problems may be developing occurs when the daily Advance-Decline Line cannot confirm new price highs by corresponding market indices. Along these lines, I not only track the NYSE A/D Line (both the common stock calculation and the traditional measure including fixed income-related issues), but also the Small Cap and Mid-Cap A/D Lines, as well as the predominately Large Cap-oriented S&P 500. Non-confirmations usually (not always) start with Small Caps and then eventually spread to the Mid-Caps, with Large Caps stocks usually the last to roll over. This process of an increasingly selective market typically takes place over a period of one to six months

S&P 600 Small Cap Advance - Decline Line Chart. New closing high (lower frame), confirmed by A/D Line. S&P 600 Small Cap Index with Rising 200-DMA and Horizontal Support (all in green). The negative non-confirmation is minor and can quickly be resolved, but until it is, the odds suggest respecting it and tightening stop loss points.


While the NYSE A/D Lines (common stock only and traditional), Mid-Cap A/D Line and S&P 500 A/D Line closed at new highs yesterday, Small Caps continue to show signs of waning buying interest on a short-term basis. 

Therefore, it is important to look for signs of improving Small Cap price performance and breadth improvement. In my view, this would be illustrated either by the Small Cap A/D Line making new highs (eliminating the negative non-confirmation), Small Cap stocks reversing their poor relative strength versus Large Caps, or by signs that the Small Cap weakness is migrating into the Mid- and Large-Cap space. Until then, due to the heightened volatility being spurred on by corporate earnings report, economic and political events, and Presidential tweets (please stop disparaging LBJ), please clearly define your risk tolerance parameters.

 PS: A tactical band of selling pressure (resistance) for the S&P 500 (2850.40) exists between 2850 and 2873. A tactical band of buying interest (support) for the S&P 500 exists between 2800 and 2790.

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 08.06.2018. Chart sources: Stockcharts.com. 

PDF Copy of Article: Day Hagan Tech Talk August 7, 2018 (PDF)

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