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S&P 500 In Solid Uptrend, Will Small Caps Derail the Rally?

David Becker
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S&P 500 In Solid Uptrend, Will Small Caps Derail the Rally?

Even though the S&P Small-Cap 600 and S&P MidCap 400 are underperforming and have stalled for several months, the S&P 500 remains in a clear uptrend and over 50 points above key support. The question is whether the S&P 500 ultimately pull small and mid-caps higher, or will weakness in small-caps and mid-caps ultimately drag the S&P 500 lower.

The total market cap for the S&P 500 exceeds $18 trillion, the total market cap for the S&P MidCap 400 is around $1.6 trillion and the total market cap for the S&P Small-Cap 600 is less than a trillion dollars. A 4% decline in the S&P 500 would knock off some $700 billion worth of market cap in the index. This is the equivalent of the entire market cap of the S&P Small-Cap 600. Whilethe relative weakness in mid-caps and small-caps is a concern, a full-blown bear market is not going to happen unless the S&P 500 breaks down.

The S&P 500 hitting a new high three weeks ago and pulled back with another garden-variety decline the last two weeks. The S&P MidCap 400 has been consolidating since June testing support in the 1350-1360 area. The S&P Small-Cap 600 has been consolidating since December and testing its 2014 lows.

The Consumer Discretionary SPDR (XLY) and the Equal-Weight Consumer Discretionary ETF (RCD) are both bouncing off important support levels to keep the long-term uptrends alive. The consumer discretionary sector is the most economically sensitive sector because it is driving by discretionary spending.

Retailers, restaurants, automakers and other consumer oriented stocks feature in this sector. The XLY is nearing the early August low with a spike to 65 on Thursday. This spike produced a hammer as the ETF closed near the high of the day. A hammer is a bullish candlestick pattern that requires confirmation, which happened Friday as the ETF gapped higher.

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