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Mid-Caps Breaking Out, Are Small-Caps Next?

Risk-on signals remain the dominant theme. As a result, we continue to believe we are close to exiting the “mixed market environment” in favor of a new, broad-based advance.

  • More and More Cyclical Areas Breaking Out. In our September 28 Compass, we noted that small-caps (IWM) and cyclicals (XOP, XLF, RCD, XLI) were still consolidating, and that we need to see breakouts to new YTD highs in order to signal the end of the “mixed environment,” and the start of a new, broad-based advance. Since that report, we have been gradually shifting to a more bullish outlook as Energy (XOP) and then Financials (XLF) broke out to new highs. We now have another breakout, this time from equal-weighted Consumer Discretionary (RCD), giving us more confidence that we are entering a new broad-based advance. That leaves small-caps (IWM) and Industrials (XLI) as the last two key areas that we would like to see break out to YTD highs, and we believe it will happen soon. Furthermore, the S&P 400 Mid-Caps (IJH) are breaking out to new highs, and we expect small-caps to follow… see charts below
  • Defensives Underperforming. Several defensive areas are hitting new RS lows; this is a bullish sign for the broad market as it signals strong risk appetites. Specifically, Consumer Staples (XLP), Utilities (XLU), pharmaceuticals (PPH), and telecom (IYZ) are all hitting new RS lows or remain in RS downtrends
ishares core s&P mid cap etf

Source:Factset

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