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Small Caps Outperform, But Nothing to Write Home About

Small caps did outperform last week, but the victory was nothing to write home about.

The Market

Well, the small caps did outperform last week. In fact the Russell 2000 was up on the week while the S&P was down. But it was the sort of victory that is nothing to write home about. My own Oscillator uses breadth not price. I have noted that it would get overbought early this week because of the math behind the Oscillator. It is the 10-day moving average of the net of breadth. So I look back 10 trading days to see what numbers we are dropping. When we drop a string of negative numbers, we are oversold. When we drop a string of positive numbers we are overbought.

On Monday, we drop the last of a string of negative readings, with the reading for the NYSE being a net negative of -2,360. That’s a big number. So even if breadth is weak at -1,600, we’d still be adding to the Oscillator just because -1,600 is less than -2,360. It’s after Monday that we start dropping positive readings, thus we’re overbought after that.

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Let me also note that Monday is the first day of the new month. As we know the Russell 2000 has made very little progress this year, since it is currently trading where it was in February. Yet, somehow the first day of the new month has been quite favorable to the Russell 2000. With the exception of January when it was down by 29 points on the first day of the year, every other month has seen the Russell 2000 up. Of the six other months, only two were higher less than 1%.

The other interesting statistic is that my Saturday Twitter poll was decidedly negative with approximately 45% looking for the next 100 points in the S&P to be on the downside and 55% on the upside. There is a consistency — at least so far — for this poll. Negativity has a reason to rally in the week following.

There is also the 10-day moving average of the equity put/call ratio which finally turned down. The 10-day moving average of stocks making new lows turned down as well.

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So yes, I think we can get one more day on the upside and then it gets a bit tougher. Quite frankly, the month of July was no picnic with the chopfest we saw, and August doesn’t look like it is going to be much different.

What I would like to see is that when (if?) those non-mega cap tech names come down, will they hold at higher lows? I think they ought to. But time will tell.

New Ideas

I think we need to keep our eyes on the transportation stocks into whatever pullback we get because the transports were not sold hard on Friday. I’m not enthusiastic about buying in an environment where we aren’t fully oversold, but I am keeping an eye on these three stocks.

For example, some truckers could be improving. Like JB Hunt (JBHT:Nasdaq)

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Or Old Dominion Freight Line (ODFL:Nasdaq)

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Or a railroad like CSX (CSX) - Get Free Report

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Today’s Indicator

The Hi-Lo Indicator has bounced. New lows must start contracting if it is to last.

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Q&A/Reader’s Feedback

Helene welcomes your questions about Top Stocks and her charting strategy and techniques. Please send an email directly to Helene with your questions. However, please remember that TheStreet.com Top Stocks is not intended to provide personalized investment advice. Email Helene here.

I was asked where I thought PayPal (PYPL:Nasdaq) was buyable. Let’s say I think it gets oversold and can enjoy an oversold bounce from that $270-ish area. To make it buyable for more than a bounce is going to take a better chart than this one. Just look what happened in February: gaps down, oversold bounce and back down again. I think that’s what I would expect again here.

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Cleveland Cliffs (CLF) - Get Free Report has a next measured target around $27-$28, but it’s a chart that hasn’t done anything wrong yet. So perhaps it stalls out at the target and corrects as it has been doing since the spring.

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Yelp (YELP) - Get Free Report has that spike low around $35.50 that ought to hold the first trip down there, but if it can’t get up and over $39, I would say the chart is more likely to be lower a few months from now than not.

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SPDR S&P Regional Banking (KRE) - Get Free Report, an ETF to be long the regional banks, looks as though it has broken. If it can’t get up and over $64 in a hurry, then I think it makes its way back to the $58-ish area

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