Points of relative strength on the domestic front have been largely consistent over the last year or so. In fact, the top four sectors within NDW’s DALI sector rankings have been the same (give or take some flip flop between the sectors) for going on one year at this point. This remains a tailwind for momentum focused strategies as leadership trends persist, a net positive for us trend followers as we move into the last quarter of the year. While momentum’s strength won’t be the topic of today’s report, we can look underneath the hood at one of the strongest sectors to discuss how you as an advisor should approach strong sectors around all-time highs.

Communication Services maintains its position in the first place within the sector rankings. No matter what way you slice it, broad sector representative XLC trades well in overbought territory at the time of this writing- clocking in with a weekly OBOS reading of ~119%. This marks the highest level since late 2024 during which META and other top-heavy tech- tilted options led the sector (and major markets higher). While it is certainly true that a strong asset can just get more overbought, the lack of support nearby (or even old resistance to look towards) makes garnering exposure around current levels a bit more difficult. From a pure technical perspective, the low $100’s mark as the next identifiable technical landmark, but pullbacks towards the 50-day MA at $110 are perhaps more likely. Remember, trading ranges can normalize two different ways- through price or by time. Strong assets typically follow the latter, so watch more sensitive charts for identifiable support levels as they emerge.

Most of the reason XLC is trading in heavily overbought territory has been a resurgence for Google, which has quickly stormed higher to new all-time highs and gained technical favor over the last few months. GOOGL is even more heavily overbought than previously mentioned XLC, currently holding a near 150% OBOS reading at the time of this writing. This marks a point only reached by the perfect 5/5’er only a handful of times over the last few decades (2015, 2010, 2007 to name a few) and would suggest that some near-term normalization could be in store. Those looking to pick up exposure could sell cash-secured puts to lock in a price at a comfortable range below current levels on constructive pullbacks (loosely between $225-$235) while generating some income in the event that trading ranges remain elevated over a predetermined time range.

While tech-focused names in the sector garner a majority of the overall interest, that isn’t to say that other areas of the sector aren’t strong. In fact, when it comes to overall participation across the 11 broad sectors, communication services sees the 2nd highest percentage of stocks (~62%) trading on a PnF buy signal, trailing only financials. Point being, much more than just the GOOGL and META of the world are advancing. Of interest for today’s piece will be T, which has surged back to life after a near-decade long slump. The 4/5’er trades on the cusp of $30 for the first time since 2017 and has support offered just below current levels at $26. It remains a technically actionable name for those looking to pick up exposure outside of growth focused communication services, and still pays you nearly 4% in dividends.

The last several years have been spoiled with all-time highs, and while most of the market had joined in the fun, small caps had yet to do so… until now. Last week ended a nearly four year streak of the Russell 2000 failing to close at a new all-time high, which is the second longest streak in the index’s history. During the almost four years in which the Russell 2000 didn’t set a high, the S&P 500 was up 42% while the Nasdaq-100 rose 50%, highlighting the persistent lag of small companies in recent years.  With the small cap dam potentially breaking loose, could we expect the group to reverse course?

Last week marked the twelfth instance in which it took the Russell 2000 longer than a year to close at a new all-time high.  Looking at the forward returns following previous streaks ending, the near-term performance of the index tends to be strong. The three-month return average was 8.3%, which is more than three times the historical three-month average return. However, long-term returns tend to slow down after that, with the six-month return barely higher than the three-month mark. While breakouts have often signaled short-term momentum, they haven’t necessarily indicated long-term strength

We know that small caps have seen renewed optimism in recent months, but which areas within the group have been driving the upside? The S&P Small Cap 600 is another small cap index that selectively focuses on more profitable companies in the small cap space. This year has seen a notable preference for the Russell 2000, with it outpacing the S&P index by more than 6%. The iShares Russell 2000 ETF (IWM) also holds a fund score that is a full point higher than iShares S&P SmallCap 600 Index Fund (IJR), showing their notable difference in relative strength as well. Outperformance in favor of the Russell is a potential sign that more speculative and less profitable growth stocks have led the way to the upside.

Comparing small cap growth and value funds furthers this notion, with the two groups looking noticeably different in strength. The iShares Russell 2000 Growth ETF (IWO) has an extremely strong fund score of 5.57, which is 1.82 points higher than the average small cap fund. Additionally, it holds a score direction of 5.16, highlighting its significant increase in strength. Meanwhile, the iShares Russell 2000 Value ETF (IWN) lags in comparison with a fund score of 3.29 and a score direction of 2.89.  While both small cap styles have improved in recent months, the magnitude of improvement from growth has been far greater than value.

Not only are there notable differences in the strength of small cap styles but also within different sectors of the group. Like the broader DALI rankings, the risk-on small cap sectors look the most attractive for the time being. Looking at the X lineup of small cap sector ETFs, Technology, Industrials, Discretionary are the three strongest by fund score. Meanwhile, defensive sectors like staples, healthcare, and utilities remain extremely weak with scores below one. For the time being, large caps continue to hold more long-term strength than small caps. However, there are still small cap areas that go toe-to-toe with large caps. The Invesco S&P SmallCap Industrials ETF (PSCI) holds a fund score of 5.49—almost half a point higher than the Industrial Select Sector SPDR Fund (XLI). Meanwhile, the Invesco S&P SmallCap Materials ETF (PSCM) is noticeably stronger than its large cap counterpart, driven partially by the small cap fund’s higher exposure to mining companies, which have been some of the market’s best performers this year.

It has yet to be seen whether the recent outperformance from small caps will manifest into long-term strength. However, risk-on areas and certain sectors within the small cap space make a compelling addition for portfolios hoping to ride the small cap wave.  

Daily Option Ideas for September 22, 2025