Saturday, December 20, 2014

Is the Market Rally Broadening or Narrowing?

One of the hallmarks of trading this year has been the underperformance of small caps relative to large caps.  As you can see from the top chart, the Russell 2000 Index (IWM) has pretty well underperformed SPY for most the year.  Recently, however, that relationship appears to have turned around.  At the recent market lows, we did not see relative lows for IWM to SPY and, indeed, IWM is trading very near its highs for the year.  Similarly, microcaps (IWC) are trading at multi-month highs.  This is relevant, because it suggests that the recent market strength has been broadening in its breadth, not narrowing like recent rallies.

In the middle chart, you can see that the cumulative NYSE TICK has bounced from recent lows, but remains below its highs for the year.  When we take the cumulative TICK for all U.S. stocks, however--which captures the buying and selling of the broadest market--we can see in the bottom chart that that has moved to new highs and never corrected significantly during the recent weakness.  

I will be watching breadth measures carefully here.  Given the expanding relative strength from the smaller caps, this does not appear to be a weakening market--which suggests that the rally should have legs.

Further Reading:  More About the U.S. TICK