Weekly Update

A Strong Year for the Broad Market Masks Plenty of Weakness

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Published December 24, 2021

Despite the broad market S&P 500 hitting new highs, this year has been one of frustration for much of the stock market. The roughly 2000 stocks that make up the small cap index have gone nowhere since February. A breakout in November offered hope that small cap stocks would join the large-cap brethren in charting new high ground. But that effort was quickly turned away. The chart below shows the brief breakout and subsequent fall back into the trading channel that has defined this group almost all year.

brief breakout and subsequent fall back

Zooming in we see that the good news for small cap stocks is that the support line for this index has consistently held. The blue arrows below the line chart several instances of this solid support, including the most recent test this past week.

breakout fails

Key to the weakness in this group has been the failure of retailers to deliver gains. Same story here – a long period of sideways trading followed by a failed breakout.

sideways trading followed by a failed breakout

It will be another interesting year ahead as we see whether the stock market can continue its run in the face of rising interest rates. Or whether those rates will press groups like retailers into a more substantial downtrend. For now, most areas of the market appear to be consolidating and poised to push higher, having mostly worked through many of the recent concerns. What new information will cause small cap stocks to exit their long sideways period? Will it break higher or lower?


Market Update

Stocks kicked off the holiday-shortened week with a -1.1% tumble as spiking Covid case numbers prompted shutdowns in some European countries and President Biden’s social-spending bill appeared in jeopardy. The bill is expected to support near-term consumer spending. A failure to pass has prompted some investment houses to write down next year’s economic growth prospects. Tuesday found investors putting all of those concerns on the back burner, however, as stocks ripped +1.8% higher to end their 3-day swoon. A strong earnings report from consumer bellwether Nike (NKE) perhaps helped turn the tide and remind investors that global sales remain quite solid. Another +1% lift in stocks Wednesday with strength coming from a rise in consumer confidence and reports that the Omicron strain of the Covid-19 virus appears to produce relatively mild symptoms and little risk of hospitalization. Markets closed the week Thursday with a +0.6% increase as the Santa Claus rally appeared in full swing in the waning weeks of 2021. Investor concerns regarding inflation have been recently assuaged by a more aggressive tone from the Federal Reserve while investors seem to expect the recent surges in Covid cases to be a temporary setback on a generally upward path in the global economy.

Stocks closed the week higher by +2.33% on the S&P 500 (SPY) with the index just touching a new record high. Since a strong rise in October, this index has been trading back-and-forth in a channel. The Nasdaq 100 (QQQ) likewise recovered the prior week’s losses with a +3.25% gain. Smallcap (IWM) stocks rose +3.21% and remain stuck in a range since February.

Warm wishes and until next week.