Wake Up! The Market’s Spilling its Guts…

Put down that coffee and listen up – the market’s revealing a fresh trading secret.

Unfortunately, most investors simply aren’t paying attention. And I can’t say that I blame them…

Right now, we’re enduring one of the most distracting markets I’ve ever experienced. Financial discourse has devolved into nothing but political gossip. Editors have replaced stock market stories and big-picture investment themes with wall to wall Trump talk. Investors know how many times the President tweeted yesterday. But they have no idea what’s moving the markets.

Only two actual financial news items slipped through the media’s political blockade last week: The Fed’s interest rate hike and worries about the major indices slipping into the red.

If we only stuck to the headlines, we would spend all our time worrying about rates ticking higher and the market rally running out of steam.

But that’s not our style. As I hinted earlier, the market’s spilling its guts right now. Just under the surface of the Dow and S&P, one group of stocks is telling us this rally ain’t over yet.

I’m talking about small-cap stocks.

After posting new highs to begin March trading, the small-cap Russell 2000 registered six straight days of losses. That failed breakout slapped the Russell back into the trading range that has trapped the index for the better part of the past three months.

That’s not bullish action. After a breakout to new highs, we like to see a little follow-through to prove that investors are buying into the rally. Instead, sellers took control.

But just as the herd started to get anxious, small stocks abruptly reversed course. While the big boys limped to the finish line last week, small-caps surged ahead, almost completely wiping out their March losses.

Strong small-caps are an important cornerstone to any broad market rally. We like to see these stocks dancing with the big boys during major moves higher. After all, small stock participation confirms that investors are willing to take a little more risk.

That’s exactly what we saw when the market first started accelerating higher in November. Even though they didn’t get much shine in the financial press, small-caps were the strongest stocks on the market during the first month of the post-election melt up. They were first out of the gate and didn’t slow down until early December. During this initial thrust higher, the Russell gained 20% while the S&P 500 rose 8%.

Then came the fizzle…

After the furious rally, small-caps lost steam. Since early December, the Russell 2000 is flat. On the other hand, the S&P 500 has risen almost 6%. The large-caps piled up most these gains during February’s Dow 20,000 run.

Right now, the FANG effect has the undivided attention of the entire investing world. The FANGs are your mega-cap market leaders: Facebook, Amazon, Netflix, and Google. These stocks are racking up the gains in 2017 after riding the pine during the most of the fourth quarter.

Don’t get me wrong – these are fantastic stocks (heck, we own three of ‘em in the trading portfolio right now). But the household name stocks are dominating the discourse as the market drifts.

No one’s watching the little stocks that helped spark the post-election rally. While the major averages sag, the market’s still sending bullish signals. Small-cap strength says it’s not time to get bearish just yet…

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning