As you can see in the 1-year chart below small cap stocks (IWM) have been ping-ponging between support and resistance (consolidating) while the broader market has gone on to make new all-time highs. This divergence had technicians on alert and concerned because we know that small caps typically lead the rest of the market into both new bull and bear markets. If the small caps could not follow with the rest of the market it was possible, if they broke down out of consolidation, they would be signaling the end of the current bull and start of a new bear. This is exactly why we track the small cap index with great interest hoping it would provide some hint as to what may be ahead.
Less than two weeks before we ring the final bell for 2014 it appears as if we have gotten our signal as small cap stocks have come roaring back, breaking out of consolidation and on to new all-time highs as you can see in the long-term chart below. With the momentum oscillators unwound but still bullishly configured it is looking eerily similar to the early part of 2013 when small caps excelled. Not only are price and momentum aligned but they have broken their downtrend and started to outperform the broader index (as we would hope to see) as can be seen in the second to bottom relative strength pane.
Of course false breakouts are always a possibility but if this turns out to be the real deal, we may be in for the start of a new equity upleg with the small caps leading the charge into the first half of 2015. Now this is what I call a New Year’s rockin’ Eve.