Small Caps Stuck, but a Bet Here Could Pay Off

by Sam Collins | June 5, 2014 7:34 am

Small Caps Stuck, but a Bet Here Could Pay Off

Stocks closed higher on Wednesday, with the S&P 500 establishing a record high while small- and mid-cap stocks outperformed the big indices.

A disappointing jobs report from ADP resulted in a lower opening. But stocks reacted positively to a better-than-expected ISM non-manufacturing index report for May, which came in at 56.3 versus estimates of 55.5, taking back the early losses.

The Federal Reserve’s Beige Book indicated hiring was “steady to stronger” from April through late May. The report pointed to an improving economy thanks in part to consumer spending and job growth.

At Wednesday’s close, the Dow Jones Industrial Average rose 15 points to 16,738, the S&P 500 gained 4 points at 1,928, and the Nasdaq jumped 18 points to 4,252. Volume on the NYSE’s primary market was just 579 million shares compared to a long-term average of 700 million. It traded a total of 2.7 billion shares. The Nasdaq crossed 1.6 billion shares. On the Big Board, there were slightly more advancers than decliners, and on the Nasdaq, advancers outpaced decliners by 1.2-to-1.

06 05 14 spx 300x188 Small Caps Stuck, but a Bet Here Could Pay Off
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chart key 300x84 Small Caps Stuck, but a Bet Here Could Pay Off[1]

Despite light volume, the S&P 500 continued to move ahead, setting another record closing high. The first support is at the 20-day moving average at just under 1,900. The more important support line is the 50-day moving average at 1,888. MACD is bullish.

06 05 14 rut 300x190 Small Caps Stuck, but a Bet Here Could Pay Off
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Just when we thought the daily trading range of the Russell 2000 couldn’t get more pinched, it did. Support is now from the 20-day moving average at 1,119 to the 50-day resistance line at 1,133, with the important 200-day moving average at 1,122. It is the 200-day that will receive most of traders’ attention.

Conclusion: According to the Stock Trader’s Almanac, June is the fourth best-performing month of the year for the Nasdaq, with an average return of 0.8%. However, it takes buyers to achieve an advance, and thus far, buyers are a rare item in the lower-quality indices.

While the S&P 500 continues to move at a snail’s pace, the small and mid caps are stuck. The Russell 2000 illustrates this best with a spread of just 12 points Wednesday from low to high — hardly enough for a day trade.

And so the divergence, or bifurcation, between the small/mid caps and big caps becomes even greater. However, the overall picture is that of an advancing bull market. Investments made now, especially in small-cap stocks, should pay off in the future.

“The trend is your friend,” and we remain long at 75% equities and 25% cash.

Note that the ECB meets today and is expected to loosen monetary policy with cuts in refinancing and deposit rates, which could have an impact on U.S. stocks.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[2].

For a list of this week’s economic reports due out, click here[3].

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2013/05/chart-key.gif
  2. click here: http://www.bloomberg.com/apps/ecal?c=US
  3. click here: http://www.bloomberg.com/markets/economic-calendar/

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