Small Cap Stocks Review

Those that view the message of the market on daily basis are likely confused by trading noise. While trading noise contributes to the long-term trends, it does not define them. Human behavior tries to explain trading noise as a meaningful trend. This confuses the majority which, in turn, contributes to their role as bagholders of trend transitions.

It's fashionable to say one is Robinhood trader today. Robinhood traders which I warned that Bitcoin was entering a period of stagnation years ago only to be told that I did not understand cryptocurrencies could be faced with a similar teaching moment in stocks in 2020. The invisible hand rules all, but many of today's inexperienced traders do not know that. Day trading has become the new quarantined religion with millions of followers and a unique set of gurus praying to the Federal Reserve. Many of these gurus likely view the invisible hand as new action hero rather than independent actions of all market participants acting in their own self-interests.

ALIGNMENT (Price & Volume)

Small Cap stocks, the leaders of sustainable, economically driven rallies have been mired in primary downtrend for 4 months. While liquidity injection and hope has made the trend unprofitable, it still must be respected until it flips up. The composite trend, a combination of the daily, weekly, and monthly trend, ebbs, and flows with energy. Today's countertrend rally, fueled by a bullish energy build in April, is slowing as the invisible hand distributes into the rally.

ENERGY (Diffusion Index)

Distribution into the rally is the cause DI and DI2 to trend lower as prices rallied. Energy builds rarely turn concentrated unless the primary trend is ready to flip, so bulls must be cautious until the primary trend flips up. Primary trend transitions rally happen when participation is high.

Russell 2000 DI

(Click on image to enlarge)

Participation (ProIndex)

Small cap stocks have been carried higher by professional and public buying until early June. The ProIndex peaked in early June. This warns that the rally is being supported by retail (inexperienced) investors.

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Disclaimer: Content provided by Eric De Groot is intended as general information and not specific recommendations. Individuals are responsible for their own investment decisions. Past ...

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