Discussing the recent rally within small caps indices and sectors.
Wednesday’s Pulse in the Daily Equity Report highlighted a 99th percentile single day outperformance over the S&P 500 Index (SPX). Even with Thursday’s pullback within equities, the Russell 2000 Index (RUT) continues to be the best performing US Equity index for the month of August but sits behind the Nasdaq-100 (NDX) in terms of Q3 performance.
This week’s action (8/8 – 8/15) brought the point and figure chart of RUT back to a buy signal and to challenge notable resistance at $2320. A move above current resistance would then bring the Index’s all-time chart high from November 2024 into play. While much of RUT’s recent improvement has come from a trending perspective and large caps still maintain their lead from a relative strength (RS) perspective, notable technical developments for the broader small cap space as of late are worth discussing.
Within the Asset Class Group Scores (ACGS) page – which evaluates asset class groups by utilizing the NDW Fund Scoring System and averaging the fund scores of all ETFs and mutual funds within a specific asset group - the recent rally within small caps have brought the Small Cap Growth, Blend, and Value groups back above the acceptable 3 score level for the first time since February. Prior to moving below 3 on the ACGS page earlier this year, each of the three small cap style groups scored above 3.0 for roughly 14 months. While investors will see if small caps can sustain this recent improvement relative to other equity indices, it is worth noting what sectors have contributed and examine the building blocks from a technical perspective.
Utilizing the ten Invesco Small Cap Sector lineup reveals notable performance from Discretionary (PSCD) and Materials (PSCM) during August, contributing to their moves up to the number 1 and 2 sectors for Q3. Given the headwinds provided by tariffs and the potential impact to both broader sectors, recent action for the stocks – possibly driven by earnings or other related factors – have somewhat “bucked the trend”, so to speak. While many may have perceived downside action due to doom and gloom around tariffs and other factors, small cap discretionary and materials stocks have witnessed positive action. The point and figure charts of both ETFs are shown below.
Invesco S&P Small Cap Consumer Discretionary (PSCD) – PSCD returned to a buy signal in the late April and shifted back into a positive trend along within an additional buy signal in July. This week’s action (8/8 – 8/15) brought a third consecutive buy signal with a double top break at $108 as shares rallied to $110. Following Tuesday’s (8/12) action, PSCD reversed into a column of Xs on its market RS chart, highlighting improvement from a relative strength basis by the ETF and increasing the ETF’s fund score up to 3.79 (as of 8/14). This marks the first time since February that the ETF has scored above 3, and the highest score since June 2024. After Thursday’s (8/14) action, PSCD maintains a Weekly OBOS reading north of 100%, meaning those who may be seeking exposure to the fund will look for a pullback to $104 on the chart before considering. Note resistance lies at $114 and $118, the November 2024 rally high, while support can be found at $100 and $96.
Invesco S&P Small Cap Materials ETF (PSCM) – On the default point and figure chart, PSCM reversed into Xs in early April and rallied to return to a buy signal in late July by breaking a double top at $77. July’s action brought the ETF back into a column of Xs on its market and peer RS charts, but the ETF’s fund score didn’t move above 3 until this week’s (8/8 – 8/15) action. On the trend chart, price action brought PSCM back into Xs and up to $77, forming a double top. Although not quite as extended as PSCD above, PSCM resides in overbought territory based on its Weekly OBOS reading (~90%) and a similar approach to adding exposure should be taken. Note resistance lies at $86, the all-time chart high, while support can be found at $73.
