Small-Caps Continue To Lag Large-Caps

10/03/06 11:46:38 AM

by Arthur Hill

While the Standard & Poor's 500 records multiyear highs, the S&P SmallCap Index remains below its July high, and continued relative weakness bodes ill for small-caps.

Security: $SML
Position: Sell

In Figure 1, the Standard & Poor's 500 found support in June–July and embarked on a strong advance the last few months. The index recorded a 4-1/2 year high and moved to its highest level since February 2001 (blue circle). Note how the index broke resistance with a surge in mid-August and never looked back (magenta oval).

FIGURE 1: S&P 500. The index found support in the June–July period and embarked on a strong advance.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

In contrast to the S&P 500, the S&P SmallCap Index (SML) remains below its July high and cannot even hold above its 200-day moving average. The index broke the 200-day average in late September, but could not hold the breakout and failed just below resistance at 380. Even the August rally failed to break the 200-day, and this index shows relative weakness.

The price relative is in the lower indicator window in Figure 2. This is a simple ratio of the S&P SmallCap Index divided by the S&P 500. The ratio increases when SML outperforms and decreases when SML underperforms. The ratio peaked in April, formed a lower high in May, and moved lower the last five months. Until the price relative breaks the trendline extending down from the May high, SML will be deemed relatively weak and should be avoided.

FIGURE 2: S&P 500. Until the price relative (below the 200-day SMA) breaks the trendline extending down from the May high, SML will be deemed weak.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

Looking back at the price chart, the S&P SmallCap Index formed a rising wedge over the last 2-1/2 months (blue trendlines). The bulls get the benefit of the doubt as long as the wedge rises. A break below the lower trendline and September low removes the bullish edge and call for a continuation of the May–July decline.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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