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Small Caps Continue to Show Relative Weakness

David Becker
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Small Caps Continue to Show Relative Weakness

September continues to be a difficult month for mid-caps, small-caps, micro-caps and some of the momentum groups. Overall, the markets have bifurcated with relative strength in large-caps and relative weakness in the other areas. Large-caps account for around 90% of the total US stock market capitalization and small-caps account for around 10%. Relative weakness in small-caps, therefore, still represents a relatively small portion of the market as a whole. Elsewhere, there seems to be weakness in some momentum groups as internet, social media and cloud computing ETFs. As with small-caps, these groups represent the high-beta or riskier end of the market.

The Russell 2000 iShares (IWM), S&P SmallCap iShares (IJR), S&P MidCap SPDR and Russell MicroCap iShares all show both relative and absolute weakness this month. They are not just under performing, but they are under selling pressure and show losses this month. While the September declines could still turn out to be mere corrections, these immediate downtrends remain valid.

The IWM with two patterns at work. First, the higher low in early August and lower high in early September mark a large triangle consolidation. Second, the September downtrend shows another lower high on Friday, and resistance to 116. A break above this level would reverse the short-term downtrend and increase the chances of a triangle breakout, which would be long-term bullish. Support on the IWM is seen near and upward sloping trend line that connects the lows in May to the lows in August and comes in near 112.

Momentum is negative with the MACD (moving average convergence divergence index printing in negative territory with a downward sloping trajectory. The relative strength index (RSI) moved lower with price action reflecting accelerating negative momentum, while printing a reading of 37, which is on the lower end of the neutral range.

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