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Forget Selling, Small Caps Finally Join the Party

Russell 2000's break through significant overhead resistance is a clear signal


Stocks rallied on a broad front Tuesday, which was partially attributed to gains in the foreign markets during the Memorial Day holiday. The ECB hinted that it might be easing monetary policy sooner than expected.

The S&P 500 and Dow Jones Transportation Average set new record highs, but buying in small-cap stocks was the highlight of the day. The Russell 2000 gained 1.4%, closing at its highest level since April 24.

Durable orders rose 0.8% in April versus an expected decline of 0.8%. And the S&P/Case-Shiller Home Price Index reported that prices were up 12.4% in March, which was higher than expected. Finally, the Consumer Confidence Index for March also rose more than projected.

At Tuesday’s close, the Dow Jones Industrial Average gained 69 points to 16,676, the S&P 500 rose 11 points at 1,912, and the Nasdaq jumped 51 points to 4,237. The NYSE traded total volume of 2.9 billion shares, and the Nasdaq crossed 1.8 billion shares. On the Big Board, advancers outpaced decliners by 1.2-to-1, and on the Nasdaq, advancers were ahead by 2.9-to-1.

Nasdaq Chart
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Chart Key

In just one day, the Nasdaq accomplished a trend shift following two months of misery. The break above a pennant on a gap and through its 50-day moving average, supported by a bullish MACD, is just what the doctor ordered.

RUT Chart
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The small-cap Russell 2000 broke through its 50-day moving average on a gap that sprang from the platform of the 200-day moving average. Thus, the neckline of a possible head-and-shoulders breakdown, which if broken to the downside could have resulted in lower prices, can now be placed on the back burner as far as technical concerns go.

Conclusion: There is now no need to sell in May — or anytime soon — since the mid- and small-cap stocks have broken through the most significant overhead resistance. The gap up from the Russell’s 200-day moving average was the most impressive feature Tuesday, because it is a clear signal that small caps are finally joining in the broad market advance.

With all major indices now bullish, our asset allocation changes from 60% equities and 40% cash to 75% equities and 25% cash. Buying quality is still the wisest course of action, but we can be relatively confident that the secular bull market has signaled that gradually higher prices are ahead.

Today’s Trading Landscape

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

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

Article printed from InvestorPlace Media,

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