We've all seen the ugliness the markets' have been in the last couple of months, equities getting hammered, commodities skyrocketing for the first time in almost a decade, currencies experiencing extreme volatility and indecision, treasury yields reaching three percent...and all while central banks are trying to scramble out of this mess by raising rates. Back in January I wrote about how small-caps were looking troublesome due to overextended performance, small-cap did decline quite heavily since but now we might be seeing overexaggerated negative sentiment surround the market.
Lots of negativity makes it difficult to look at the markets in a neutral way, which is why I want to try to bring everyone back to a more unbiased view of the markets, in particular equities. I want to take a look at some small-caps today. Small-caps have seen some mixed performance, naturally some have seen some steady or fast gains while others, actually most of them, have been trading sideways for almost more than a year now. Take a look at the S&P 600 small-caps index below, we can see the clear sideways movement for more than a year now.
Now, we're going to have a bit of an issue if the index closes below the 86 level which is the clear level that would equate the start of a bear market in small-caps (admittedly on a theoretical basis). So, we're definitely not in the clear just yet. Take a look at the chart below, the same small-caps index chart. Yes, the famous yet misused and abused head & shoulders pattern...Definitely not a pleasant sight given how the general market's been behaving. However, it might not be as bad as we think when we dig a little deeper into the small-cap space.
If we take a look at individual small-cap stocks, we see quite a different picture. As we mentioned before, most small-caps have been doing nothing other than move sideways for a year. This is especially visible on the weekly scale charts. Most stocks are clearly in a consolidation with quite a few looking like accumulation instead of distribution. Take a look at some small-cap stocks below, I've randomly picked a few of them but there are lots more that look exactly like this. Note, the charts are plotted on a linear scale to better see the consolidations taking place.
It is too early to say what these stocks are about to do, they could very well breakdown but I'm starting to think that investors and traders alike have been spoiled by irresponsible central bank policies into believing that stocks don't decline in price and now that we're seeing some headwind people are starting to panic. The industry is consistently analyzing and dissecting every little decline in price to come up with a new narrative without keeping in mind the big picture, which for a lot of these small-caps actually looks really acceptable given the circumstances. Below are a few more to give you an idea of how they are setting up.
Do you see how these individual stocks don't look as bad as you thought? The performances we saw back in 2020 was exceptional so wouldn't it be logical to see these same stocks take a breather before they start moving higher again?
What's your opinion on small-caps and the general market? Do you think the negativity surrounding equities is warranted? Or are we about to see equities move back into bull market territory? I'd love to hear your opinion! Don't hesitate to comment on the post or reach out via the contact form.