Small Caps Leading the Party in the Markets

It may also be a time for patience among the large-caps for investors

Friday ended a highly volatile week with huge gains for the major indices but tempered slightly by mixed trading, as traders consolidated some positions and took profits in others. The surprising victory by Republicans earned them not only the presidency but majorities in both houses of Congress.

The markets embraced the change, and for the balance of the week rallied, led by sectors that were perceived to benefit from the change in leadership: The financial sector led (up 11.3%), healthcare gained 5.8%, industrials rose 8% and materials rose 3.6%. Mining and metals companies surged on Wednesday with Rio Tinto Plc (ADR) (NYSE:RIO), the world’s second-largest miner, gaining 2.5%.

A weakening dollar made commodities cheaper, and copper and nickel gained 2.7% and 2.9%, respectively. On Friday, the world’s largest listed copper producer, Freeport-McMoRan Inc (NYSE:FCX), gained 1% but jumped over 25% for the week.

On Friday rate hike expectations for December rose to 81.1%, up almost 10% from the prior Friday.

At the close on Friday the Dow Jones Industrial Average gained 40 points at 18,848, the S&P 500 fell 3 to 2,164, the Nasdaq rose 28 at 5,237, and the Russell 2000 closed at 1,282 for a gain of 31 points. The NYSE’s primary exchange traded 1.2 billion shares with total volume of 5 billion shares. The Nasdaq crossed 2.3 billion shares. On the Big Board, advancers outpaced decliners by 1.2-to-1, and on the Nasdaq, advancers led by 2.4-to-1. Blocks on the NYSE fell to 6,344 from 7,185 on Thursday.

For the week: The DJIA gained 5.4%, the S&P 500 rose 3.8%, the Nasdaq rose 3.8% and the Russell 2000 jumped 10.1%.

S&P mid-cap (MDY) Attacks Bull Inf Pt
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Russell 2000: Small Caps Leading the Party in the Markets

Last week, stocks in general were supported with a general, high-volume market rally. But mid- and small-caps, here represented by the SPDR S&P MidCap 400 ETF (NYSEARCA:MDY), clearly led the field of larger indices. Both, however, slowed in volume, momentum, and breadth. And, unless the MDY can find some buyers early this week, it may have a tendency to test the short-term bearish inflection point at 279.

Russ 2000 (IWM) blast-off overbot
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The week ended with small-caps, as represented by the exchange-traded fund iShares Russell 2000 Index (ETF) (NYSEARCA:IWM), blasting to a new 52-week high. That’s great news for the bulls — despite the overbought condition, the small-caps are leading the entire market. A pullback has broad support at $120 to $125.

Conclusion: On Friday, volume fell slightly, but that could be attributed to the Veteran’s Day holiday and partial market global closings primarily in the fixed income markets.

However, despite the “blast-off,” I wouldn’t chase big-cap stocks at current levels. Patience will reward those who can resist the “can’t miss the bull syndrome” of buying “at the market.” The bull market has, however, been confirmed and with certain exceptions (technology), there are many sectors that are still oversold. Long-term pharmaceuticals, biotechs, etc., are examples — see my short list on Thursday’s DTA of oversold sectors.

Have a great week.

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.

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