Dow Leads Market as Small Caps Lag

Monday’s positive start was a good sign with the Dow leading the way with decent gains. Exchange volume fell against Friday’s level, but overall price action was positive. We still can’t seem to get exchange volume and price action moving in tandem. Energy was the day’s biggest loser as Crude Oil continues its fall after trading above $70 a barrel. The Dollar index is about to see its 50-day cross back above its 200-day moving average. Known as the “Golden Cross” is a bullish signal for the index and thus putting pressure on crude prices. The yield curve continues to flatten out despite the rally in bond prices and with the Federal Reserve Bank set to raise rates next week it will be interesting to see how yields on US Treasuries play out. A flattening yield curve isn’t necessarily a bad thing, but when the curve inverts it typically signals a recession is near. We’ll be keeping an eye out, but in the meantime our focus will remain on the price action of our stocks.

The S&P 500 and Dow Jones Industrial Average still need to work through major overhead resistance. IWM and IWC both punched through and are hitting new all-time highs while SPY and DIA are sitting in the rearview. Investors certainly upped their risk profiles with IWC and IWM (Micro Cap and Small Cap) running higher. Perhaps the stock market is sniffing out much higher inflation or simply trying to find alpha. Who knows, but one thing is for sure Micro and Small Cap stocks have and look to continue to be the leaders. Remember, the reason is inconsequential to us and we’d prefer simply moving with leaders regardless of the reason behind the move. Big Macro funds and CNBC will have you believing you need to know prior to entire the position. Proper technical price points, position sizing, and exits are what is needed to be highly successful in this game.

There are a lot of stocks out there setting up and looking good. We are nearly fully invested as we continue to see new signals daily. Are there enough buyers remaining to support this market moving higher? It is anyone’s best guess. However, from our vantage point we do not see any evidence this rally is about to falter. Maybe the Fed throws a monkey wrench into things by hiking rates by 50bps versus 25 bps. At this stage why even entertain what “might” happen when we can control our outcome through proper risk management. No need to ponder the future, but we prefer to focus on the now and known.

We hope you have a fantastic week of trading!