Stocks Break Higher, and Small Caps Lead the Charge

Market Moves

Market indexes jumped higher early in the session and didn’t give back their gains to end the day. While the S&P 500 (SPX), Nasdaq 100 (NDX), and Dow Jones Industrial (DJX) indexes all surged higher, it was the small- and micro-cap indexes that showed the most dramatic movements by far. This coordinated move higher in the indexes that also coincides with a significant number of new highs is a highly bullish indication.

The chart below shows how iShares’ index-tracking ETFs for both the Russell 2000 (IWM) and the Russell Microcap (IWC) closed over 2% higher and posted their highest close in the past six months. This kind of price action should drive shrewd chart watchers to drill deeper into the small-cap stock ranks to see which stocks are the strongest drivers of the move. Such top-down analysis activity is a valuable way to uncover the best candidates for momentum or relative-strength-based investing.

Top Three Small-Cap Stocks on a Tear

Looking deeper into the top three holdings in IWM, the strength of these stocks is easily apparent. These stocks have returned 20% to 70% gains in just the past six months. This is an impressive performance, but the breakout signal from the index today indicates that this level of performance may continue.

Relative strength studies often suggest that stocks that have outperformed well over a given time frame are likely to continue to perform well over that same time frame going forward. Stocks with such strong performance are worth a closer look.

Teledoc Flashes a Warning Signal

One stock among these three top holdings, Teledoc Health, Inc. (TDOC), bears a closer look. While the performance is strong, the stock shows an underlying weakness in the volume signal. The chart below shows how the stock is breaking out to higher price levels on lower volume. This action often implies that the stock’s investors will not have enough continued interest to push the stock higher in a sustained upward trend.

This is underscored by a comparison between the Relative Strength Index (RSI) and the Money Flow Index (MFI). These two indicators share the same calculation with only one variation: the MFI is weighted for volume. This variation between the indexes shows that the MFI tracks much lower than the RSI, giving traders and investors alike a warning that this breakout action may not last. 

The Bottom Line

Stocks are off to the races as indexes broke out of the gate in today’s session, making new highs. The small-cap indexes showed the strongest and most notable performance. This is a bullish indication for stocks in general. Among small-cap stocks that broke out, Teledoc Health shows a subtle pattern of weakness.

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