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Technology and Small Caps Regain Leadership

David Becker
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Technology and Small Caps Regain Leadership

Stocks saw old leaders move to the forefront, which could be a sign that the rally is beginning to pick up steam. The Nasdaq technology index along with small caps led by the Russell 2000, surged during the prior week and the price action exhibited bodes well for further increases in the broader indexes.

This week’s strong chart action in the Nasdaq market and small caps has lent more support to large cap stock indexes that have been setting new record highs. Power shares QQQ Trust breaking out to a new recovery high this week. Its relative strength ratio has also been rising. Relative weakness in the Nasdaq between February and April had been one of the drags on the rest of the market. The same is true of small caps. The Russell 2000 iShares (NYSEARCA:IWM) climbing to a two-month high and ending well above its 50-day moving average. Small caps actually did better than large caps during the week. That is reflected in its relative strength ratio which bounced this week. The RUTSPX ratio has been stabilizing over the last month after falling sharply from March to May.


Sector rotations have also turned more positive. Six of the nine sector SPDRs hit new highs this week. Financials had been one of the market’s weaker sectors since March. It was one of the strongest this week and was led higher by insurance and bank stocks. That’s a good sign for the market. Although they did not hit new highs, cyclical stocks also had a good week. The Consumer Discretionary SPDR (NYSEARCA:XLY) has also climbed to a three-month high. Its relative strength ratio has also started climbing for the first time in three months. That shows more optimism on the economy. The XLY was led higher by autos and homebuilders. The two other sector SPDRS that did not hit new highs were healthcare and utilities, which are more defensive in nature.

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