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Seasonal Small-Cap Rally Nearing End

When the treacherous Ides of March and the festive remembrance of the patron saint of Ireland, Saint Patrick, approaches, the seasonal small cap rally often comes to a close. As illustrated on page 110 of the Stock Trader’s Almanac 2017 the Russell 2000 Index of small cap stocks begins to fade versus its large-cap counterpart in mid-March. The recent pullback in the market has many folks calling a top on an exhausted, overvalued market. Relax, the market is most likely consolidating its massive move from November and working off its rather overbought condition.

Trump’s first 100 days are about halfway over and things are heating up in DC. This ramped up political activity and the usually soft end of Q1 may push the market a bit lower before another leg up commences. We may end up getting a deeper correction after the next leg up in the Worst Six Months. But for now though the S&P 500 (along with the DJIA and NASDAQ) is holding pretty solidly above support – the Russell 2000 and the small caps less so.

In the chart below of the S&P you can see the breakdown from the overbought condition in the stochastic, relative strength and MACD indicators in the lower three panes. In the top pane the S&P has some serious support around 2280 – that’s about a 5% correction from the high. 2280 is at the upper end of the big December-January consolidation just after the December breakout. And it’s right on last month’s blue-dotted line pivot point and just below the current green dotted line pivot point support and the pink line 50-day MA. The next level of support is near 2200 just before the December breakout.

The Russell 2000 on the other hand is right at support of about 1355. This coincides with the December-January consolidation, the November high and its current green dotted line pivot point support. Lower support near 1305 aligns with the upper end of the initial November rally after the election, the early December low and January’s green dotted line pivot point support.