Last Friday’s Pulse went into further detail about the recent upside action for small caps as the area has rallied substantially off of 2025 lows. Without rehashing the entire piece, the move has certainly been constructive with RUT moving back into a positive trend on its default chart… but an astute analyst then asks the question: what next?
Last Friday’s Pulse went into further detail about the recent upside action for small caps as the area has rallied substantially off of 2025 lows. Without rehashing the entire piece, the move has certainly been constructive with RUT moving back into a positive trend on its default chart… but an astute analyst then asks the question: what next? After all, small caps can move around quite quickly, so before deploying cash on the trend break, some digging should be done.
In most cases, said “digging” for the analyst team involves looking underneath the hood at underlying participation. For the uninitiated, “participation” defines what percentage of a specific universe exhibits traits we desire. In most cases (including today’s) we will look at some combination of ten week, (measures percentage of stocks trading above ~50-day MA, near-term) bullish percent (measures percentage of stocks trading on a PnF buy signal, intermediate term) and the positive trend (measures percentage of stocks trading in a long-term positive trend, long-term.) High participation is typically a good thing as markets move higher, while lower values with otherwise significant upside action can signal a rather narrow/concentrated subset of the universe driving action up. It goes without saying the latter can be a somewhat dangerous market environment to be buying into.
Today’s pulse will dive deeper into the dispersion of readings for ^BPSCAP & ^BPLCAP, which measure the respective percentage of small & large cap stocks listed on the platform that trade on a Point & Figure buy signal. ^BPLCAP trades at 68% as of 5/12, signaling nearly 7 of every ten large cap stocks are on a buy signal. On the contrary, ^BPSCAP sits at a chart reading of just 24%, meaning roughly 1/4th of small caps trade on a buy signal. Said plainly, participation in the small cap space has been somewhat lackluster, even with the productive move off the localized bottom. This spread is roughly the largest in our indicator history dating back to 2001. This spread may change after today’s market move, but the dispersion between large and small caps is still clear.
While long-term performance metrics for both RUT and SPX following such participation spreads are somewhat in line with historical averages, they have clustered around some interesting market environments. The table below breaks down these dates (excluding clusters) in more detail. As mentioned before, longer-term performance metrics are typically somewhat average, but more near-intermediate term performance showings are relatively poor for both RUT & SPX. All this to say, continue to exercise caution across markets, especially small caps. Participation is key when it comes to sustained bull markets, and a lack of said upside is a yellow frag on the horizon, even with the nice trend break for RUT.
