Small Caps Look Like Traders’ Strongest Bet

by Sam Collins | January 15, 2013 2:18 am

Small Caps Look Like Traders’ Strongest Bet

Despite the impact of a sell-off in technology giant Apple (NASDAQ:AAPL[1]), other technology stocks had significant gains. Hewlett-Packard (NYSE:HPQ[2]) rose 4.9% on rumors of going private, Cisco Systems (NASDAQ:CSCO[3]) gained 2.4%, and Dell (NASDAQ:DELL[4]) jumped 13% on rumors of a buyout.

At Monday’s close, the Dow Jones Industrial Average was up 19 points to 13,507, the S&P 500 fell 1 point to 1,471, and the Nasdaq lost 8 points at 3,118. The NYSE traded 590 million shares and the Nasdaq crossed 404 million. On the Big Board, advancers edged out decliners by a small margin, and on the Nasdaq, decliners were ahead by 1.2-to-1.

01 15 13 rut 300x207 Small Caps Look Like Traders Strongest Bet
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chart key 300x84 Small Caps Look Like Traders Strongest Bet

The Russell 2000 small-cap index broke from a “deep V” formation on Jan. 2, and like the more widely followed indices, is consolidating following the big gain. But unlike the Dow (see Monday’s Daily Market Outlook[5]), the Russell 2000 has broken to new highs and, although overbought, has no resistance above the current level since it is at an all-time high. Therefore, pullbacks should be shallow followed by spikes to higher levels.

01 15 13 nyse 300x207 Small Caps Look Like Traders Strongest Bet
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The NYSE Composite made a sharp break through the neckline of an inverse head-and-shoulders formation on a powerful breakaway gap. However, unlike the Russell 2000, it is not close to a new all-time high, so it should find some resistance as it plods higher.

These charts are the most bullish patterns that we’ve seen in years, and so we anticipate that individual stocks will do well. However, since the major breakout of Jan. 2, the advance has slowed and volume has declined. Monday’s volume was the lowest of the month.

Our internal indicators are overbought, and sentiment numbers have taken on a bullish bias (AAII bulls rose 7.7 points last week), but since they are contra-indicators, they warn of a mild pullback.

Conclusion: Volume has declined sharply as investors await the important Q4 earnings results. So far, they have been favorable, especially in the technology and small-cap sectors. Traders should therefore focus on small caps for trades, and investors should review their buy lists for possible upcoming bargains if the large caps become subject to profit-taking.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[6].

For a list of this week’s economic reports due out, click here[7].

  1. AAPL:
  2. HPQ:
  3. CSCO:
  4. DELL:
  5. Daily Market Outlook:
  6. click here:
  7. click here:

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