Trading Places with Tom Bowley

Rotation To Small Caps Continues

 | 

We've seen a hiccup the past few days, but overall money has rotated strongly into small caps. There are a couple ways to visualize this rotation. I tend to use price relative charts so that I can view the relative momentum on a historical basis. To do this, simply type in "$SML:$SPX" at StockCharts.com in the symbol area provided:

The uptrend is quite clear, yet we do see the relative performance of small caps rolling over in recent sessions. Another way to visualize relative performance is to use the Relative Rotation Graph (RRG) charts. To show this same example on an RRG chart, you simply type in the $SML and compare it to a benchmark, which in this case is the $SPX:

This is a weekly depiction of relative strength and you can see that the $SML is well into the leading quadrant, which is a different way of illustrating the relative strength shown on the price relative chart. The $SML moved into the leading quadrant about 15 weeks ago, just about the time it had a triple top breakout on its absolute price chart:

The next question I'd have is "which areas of the small cap universe are performing best?" Well, now let's use the $SML as the benchmark and see how the various small cap sector ETFs are performing on a relative basis:

When I look at this chart, I see 3 small cap sector ETFs that look particularly appealing right now. The leader undeniably is small cap energy (PSCE), which is well into the leading quadrant. We're seeing relative momentum cool off a bit, but relative strength keeps moving further and further to the right, an excellent signal. Anything to the right of the vertical line in the center of the chart reflects solid relative strength. I tend to focus on components on that side of the chart - just my interpretation. Small cap technology (PSCT) is moving to the right in the leading quadrant, so that would be my second choice. Finally, I'm a fan of areas that (1) show relative strength, (2) go through a period of relative consolidation and fall into the weakening quadrant, and (3) storm back into the leading quadrant. That's exactly what's happening with the small cap discretionary sector (PSCD). So those would be my three choices in the small cap area right now - PSCE, PSCT, and PSCD. During our webinar later this morning, I'll show you how to further break down these 3 small cap sectors.

Webinar Today

Julius de Kempenaer, creator of the RRG charts, will be joining me at 10:00am ET today for a FREE event. We'll have a lively discussion featuring U.S. equities, global markets, cryptocurrencies (you need to see Julius' RRG interpretation), and much, much more. It's open to all EarningsBeats.com community members. To be part of our community, you simply need to be, at a minimum, an EB Digest (free newsletter, no credit card required) subscriber. You can join our webinar today by clicking on the room link below. If you're not already an EB.com community member, we'll add you as a free EB Digest newsletter, which is published 3x per week on Mondays, Wednesdays, and Fridays.

Room link: https://us02web.zoom.us/j/88284572577

The room opened at 8:45am ET, so you can make sure you arrive early and get your seat. Then we'll get the event started at 10:00am ET. Come join us!

Happy trading!

Tom


Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
Subscribe to Trading Places with Tom Bowley to be notified whenever a new post is added to this blog!
comments powered by Disqus