The Bull Has Left the Bear in the Dust: It’s Time To Add Small Caps To Your Portfolio

The Fed is done raising interest rates. At least, that's what the stock market has priced in, based on recent inflation data. We've also seen an uptrend in weekly jobless claims and signs that suggest that consumer spending may be slowing down.

A slowdown, or soft landing, is something most investors would prefer to see—stability vs. uncertainty. And it looks like the US economy is heading in that direction. Although consumer spending may slow down, household wealth is still healthy, preventing the economy from heading into a recession. The stock market is on track for a third positive weekly win streak.

Investor enthusiasm spiked when the CPI data came in unchanged. The softer PPI helped eke out more of a rally in the broader indexes, although at a much more muted level. Overall, the week ended on a positive note.

While the highlight of the recent rally saw the S&P 500 and Nasdaq Composite stocks draw a lot of attention, the Dow Jones Industrial Average wasn't too shabby. On a monthly basis, the Dow, like the S&P 500 and Nasdaq Composite, is trading above its 50-month moving average.

CHART 1: MONTHLY CHART OF DOW JONES INDUSTRIAL AVERAGE. The index is trading above its 50-month moving average (red line). So far, November has been a strong month for the index. Chart source: StockCharts.com. For educational purposes.

On a weekly scale, the Dow, with the exception of the 2022 dip, has been trending within a slightly upward-sloping price channel. A break above the channel would pave the way for a Dow Jones Industrial Average all-time high. Note that the 50-week simple moving average (SMA) has crossed above the 100-week SMA.

CHART 2: WEEKLY CHART OF DOW JONES INDUSTRIAL AVERAGE. A break above the upward-sloping channel would be very positive for the index. Chart source: StockCharts.com. For educational purposes.

The daily chart of the Dow Jones Industrial Average shows the index trading above its 100-day SMA (see below). This moving average could be a support level on the downside. Looking at the chart of the Dow Jones Industrial Average today, you won't see much resistance between now and the Dow's all-time high.

CHART 3: DAILY CHART OF DOW JONES INDUSTRIAL AVERAGE. It's a clear path to the index's all-time high. If the bullish sentiment remains strong, we could see the broader index reach new highs in 2023. Chart source: StockCharts.com. For educational purposes.

Are Small Cap Stocks Catching Up to the Large Caps?

Another area to focus on as the year comes to an end is small-cap stocks. This asset group has struggled to catch up with the large-cap stocks, but small-caps could be making a comeback.

CHART 4: S&P 600 SMALL CAP INDEX. Small caps are showing signs of life in their value and breadth. The percentage of S&P 600 stocks above their 50-day moving average is at 65.7%, Advance-Decline percent is at 62%, and Volume Advance-Decline Percent is at 51.5%. These are all indications of improving market breadth. Chart source: StockCharts.com. For educational purposes.

In a recent episode of The Final Bar, our chief market strategist, David Keller, CMT, spoke with Craig Johnson, CFA, CMT, who made an interesting case for small-cap performance for the last few months of 2023. Be sure to check out the episode.

Small caps could also be less influenced by news that sends large-cap stocks into big swings. Look at how a large-cap stock such as Microsoft (MSFT) fell after Sam Altman, CEO of OpenAI, exited the company.

In addition to small caps, the Invesco S&P Equal Weighted Index ETF (RSP) is showing signs of trending higher,  as are Materials and Industrials. If these areas show signs of a clear uptrend, we can kiss the bear goodbye. And with the bear out of the way, there will be one less thing to worry about as we approach the holiday season.

Retail Sector Sending Mixed Messages

As the holiday shopping season starts, investors may want to focus on retail shares. Shares of clothing retailer Gap, Inc. (GPS) gapped higher after reporting better-than-expected earnings. This news helped other retailers, such as Ross Stores (ROST), the largest percentage gainer in the S&P 500.

Earlier this week, Target (TGT) announced strong earnings, which sent its stock price higher. This was refreshing, especially after the stock's steep downfall. Walmart (WMT), however, was a different story. Even though its earnings were strong, the retailer mentioned that consumer spending is slowing down, which could impact its bottom line next quarter. WMT stock price gapped significantly lower after its earnings report and is now trading close to its October low.

A slowdown in spending doesn't mean consumers will stop spending. The economy is still healthy, and overall, we may be in for a bull rally from now to the end of the year.

End-of-Week Wrap-Up

US equity indexes up; volatility down

$SPX up 0.13% at 4514, $INDU up 0.01% at 34947; $COMPQ up 0.08% at 14125$VIX down 3.63% at 13.80Best performing sector for the week: Real EstateWorst performing sector for the week: Consumer StaplesTop 5 Large Cap SCTR stocks: Vertiv Holdings, LLC (VRT); Palantir Technologies, Inc. (PLTR); DraftKings, Inc. (DKNG), PDD Holdings (PDD); New Oriental Education & Technology Group, Inc. (EDU)

On the Radar Next Week

NVIDA earningsOctober existing home salesOctober durable goods ordersNovember PMI

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.