Small caps are leading the downside and breadth indicators are showing serious deterioration beneath the surface. Large-caps are holding for now, but remember that weakness in small-caps heralded SPY’s January 2022 peak. Today’s article compares price charts for SPY and IWM, then looks at the bearish signal in the composite breadth model.
Small caps are leading lower as the Russell 2000 ETF (IWM) and Russell Microcap ETF (IWC) are in downtrends according to the Trend Composite. Also note that IWC posted a 52-week low this week. The chart below shows that IWM falls from November 2021 to June 2022 and then consolidates with a large symmetrical triangle. A consolidation after a large decline is typically a continuation pattern that represents a pause within the larger downtrend. IWM broke the triangle line and this signals a continuation down.
Note that IWM peaked on November 8, 2021 and SPY on January 3, 2022, about two months after IWM. This means that IWM led the way down, announcing the market top in January 2022. Flashback to March 2023 and we see IWM leading back down. SPY remains well above its December low, down just 0.78% in March. IWM, on the other hand, closed below its December (closing) low on Thursday and is down 9.53% in March. The chart below shows SPY breaking wedge support and this break is bearish.
The generals will probably follow the troops. The indicator window on the chart above shows that the composite breadth model turns bearish on March 13th. This model uses fourteen broad indicators from the S&P 500 and S&P 1500. There are many more small-cap stocks (troops) than large-cap stocks (generals), and that means that broad indicators reflect the performance of smaller stocks. SPY is a market cap-weighted ETF that tracks the performance of large-cap stocks. Although the generals (SPY, QQQ) are holding, the troops (small-caps) are retreating and I expect the generals to follow.
The Composite Breadth Model (CBM) is our main market Timing tool at TrendInvestorPro. This model measures the weight of evidence for the stock market as a whole and acts as our market filter for trending and momentum strategies. Whipsaws happen, but our quantified results show that market filters improve returns and greatly reduce drawdowns over the long term. Click here to learn more about our trend momentum strategies and mean reversion strategy for trading ETFs.
The Trend Composite, ATR Trailing Stop and nine other indicators are part of the TrendInvestorPro Indicator Edge Plugin for StockCharts ACP. Click here to take your analysis process to the next level.
—————————————————–
Arthur Hill, CMT, is Chief Technical Strategist at TrendInvestorPro.com. Focused primarily on US stocks and ETFs, his systematic approach to spotting trends, finding signals within trends and setting key price levels has made him a valued market technician. Arthur has written articles for numerous financial publications including bars And Magazine for stocks and commodities. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from Cass Business School, City University, London.
