Small is Getting Bigger

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On Monday, the S&P 500 posted its second best rally of the month with a gain of 1.1%. Nonetheless, the index fell just short (by 0.06) of a new closing recovery high. Breadth was positive by 10:3 and the up/down volume ratio was positive by better than 4:1. However, total volume declined by more than half and fell back below its 21-dma. The daily Coppock Curve has a bullish bias for 13 of the 24 S&P industry groups.

While the S&P 500 had a good day, the S&P 600 Smallcap Index had an even better day, rallying 1.4%. Indeed, this was the seventh straight day where the “600” outperformed the “500.” This is a relationship that we will have to watch more closely in the weeks ahead. In this week’s STR, we noted that a case could be made that the market’s internal peak was actually made in September. Tha is also when the “600” recorded an intermediate peak versus the “500” and began a relative decline that endured into December. So, if the recent improvement has “legs,” it could be a sign that the overall market rally is broadening out. That, in turn, would increase the likelihood of still higher highs by the popular averages.

That said, outperformance is not limited to uptrends. The “600” could hold up relatively well during a market correction. This, too, would help maintain the relative strength pattern favoring small cap stocks over large caps.

S&P 600/500 Relative

With all of that in mind, relative momentum suggests that the smallcap index can indeed continue to outperform its big cap sibling. Near term momentum is at confirming “good overbought” levels; as the nearby chart shows, the last few times that the stochastic indicator moved to overbought levels similar to the current condition, the relative rally then in force still had more life left in it. Moreover, the weekly Coppock Curve for the “600”/”500” relative has just reversed to the upside and has the potential to maintain this new bullish bias through much of 2010’s first quarter.

In absolute terms, the “600’s” pattern is similar to that for the “500.” The post-March pattern is corrective, and the November 2 low (294) is key support akin to the 1029 benchmark we have been using for the “500.”

In terms of resistance, the “600” has already retraced more than 50% of the 2007-2009 bear market and is within a fraction of a point of breaking out to new recovery highs. Such a breakout would open the door for a challenge of chart and Fibonacci (a 61.8% retracement) resistance in the 340.347 range.