Large-Cap Vs. Small-Cap: Market "Tea Leaves"

Welcome to another trading week. 

In appreciation of all of our readers at Finom Group, we offer the following excerpts from our Weekly Research Report. Our weekly report is extremely detailed and has proven to help guide investors and traders during all types of market conditions with thoughtful insights and analysis, graphs, studies, and historical data/analogs. Have a great trading week, be in touch, and take a look at some of the materials in this weekend’s published Research Report.

Research Report Excerpts #1

The breakout in the DJT is another sign of a broadening-out of market strength, within the context of the ongoing market consolidation. Breakouts can prove to be false breakouts upon retests to the downside and how investors engage such a retest. I would anticipate a retest in the coming week, so watch the DJT closely as the week progresses. Good things are happening underneath the surface of the major indices, you just need to know where to look. (chart from Chris Ciovacco)

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Moreover, the DJT:SPY ratio has also shown a breakout above a descending trend-line this past week. While the S&P 500 has weakened, this is just another way of validating that sector rotations are taking place and investors are still buying stocks/ETFs. The more sectors that prove to support the market, the likelihood that consolidation concludes and the uptrend resumes. Be patient, however, as there is nothing wrong with better valuations for the same fundamental sector or stock growth outlook. If you wanted cheaper prices, they are here; don’t overlook a sale. So let’s remind ourselves that stocks on sale are a good thing, but fear of price pressure is a bad thing with the following sentiment:

You can often pinpoint the beginnings of investor underperformance when a bull market finds consolidation. The slightest hint of stocks declining brings out the worst in investors. The former “I’ll buy on a pullback” is replaced with gripping fear of falling pricesIt takes courage to buy the dip. It takes courage to envision a better and brighter future ahead.”

Research Report Excerpts #2

Naturally, if the S&P 500 has fallen 8% and underperformed the Russell, the Nasdaq has a greater magnitude of underperformance relative to the Russell small-cap index. The Russell is only down 2.1% month-to-date while the Nasdaq is down 10.3% in September. The Russell is now on course for its best relative performance with the Nasdaq since 2016. If there is one chart that identifies how typical this market recovery cycle has been, it would be the following chart:

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The Russell’s performance in late 2016 mirrors that of today. If we look back to that time period and project forward, investors might recognize the Nasdaq’s returns from November 2016 through all of 2017? (Nasdaq rose ~37%)

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Research Report Excerpts #3

Given that the week following the September Options Expiration week is typically the absolute worst week for the S&P 500 annually, one might anticipate more weakness in the week ahead. This might find the S&P 50 filling this gap from 3,284 to 3,272, as shown in the chart above. The gap fill may find a tradable bounce and from there…

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