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This weird divergence tells us a lot about stocks right now

This weird divergence tells us a lot about stocks right now

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This weird divergence tells us a lot about stocks right now

This weird divergence tells us a lot about stocks right now
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Small fortune: Why history tells you to buy small caps now

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Small fortune: Why history tells you to buy small caps now

It’s beena hot summer for the markets, but not all indexes are basking in the sun.

While the large-cap S&P 500 index is hitting an all-time high, the small-cap Russell 2000 is down 0.5 percent for the year. Meanwhile, the Nasdaq Composite and Nasdaq-100 indexes are also flying high, hitting levels not seen since the days of Tech Bubble 1.0. Those two indexes are up 8.5 and 12.7 percent, respectively.

The spread between big-cap stocks and small-cap stocks betrays an underlying truth about the economy, said David Seaburg, head of equity sales trading at Cowen and Company.

“The market is trying to tell us something,” he said. “There is a real comfort level around a lot of these bigger companies because of the stability.”

That stability is important, according to Seaburg, because policymakers at the Federal Reserve recently discussed raising rates due to stronger-than-expected economic data.

But Seaburg warns that if the Fed raises rates in an environment where wages and jobs aren’t as good as the data suggest, “it could be a very disturbing thing from a top line growth perspective.” That “could keep a damper on a lot of these smaller-to-mid-tier type companies—and larger ones as well, but to a lesser extent.”

(Watch: Market having melt-up: Dennis Gartman)

For Steven Pytlar, chief equity strategist at Prime Executions, the charts look promising for small- and large-cap stocks alike.

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Looking at a two-year chart of the Nasdaq-100, an index of the 100 largest non-financial companies trading at the Nasdaq, Pytlar sees strong positive technical signals. He notes that the index has traded within a band of two standard deviations around the general trend since the beginning of 2013.

“It has more or less oscillated on an upward trajectory the whole time,” Pytlar said. “Usually when we see that, it’s a signal that the trend is healthy, that the underlying drivers are continuing, that capital is coming in, and people are accumulating equities. And so what we’re seeing in the [Nasdaq-100] doesn’t really tell us to be worried very much. We think that the trend can continue.”

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The two-year chart looks different for the Russell 2000, but Pytlar’s optimism is similar. He notes that the small-cap index has traded within a range between 1,100 and 1,208 during that time period.

(Read: 14 stocks that hold up best at market highs)

“Major support at about the 1,100 level has held on several tests, and we’ve seen very strong buying come in at that level,” Pytlar said.

In the end, Pytlar think both doing types of stocks will do well, albeit at different paces. That’s because larger companies have been better able to take advantage of interest rates when they were lower.

“A lot of large-cap companies have already refinanced,” he said. “Small-cap companies may have trouble raising capital in a higher interest rate environment… We don’t know if that trend is going to change, but just in nominal terms, we do think both look good technically.”

To see the full discussion on large-cap versus small-cap stocks, with Seaburg on the fundamentals and Pytlar on the technicals, watch the above video.

 

 

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