Other than a few intermittent spurts, US small cap stock performance has significantly under-performed the broader market SP500 index for more than a year and a half. In fact, it has lagged by more than 14% over this short time. Unlike the broader market and other sectors (i.e. technology) small caps have not yet broken out to new highs.

Small cap strength is typically a pervasive element in a strong stock bull market. Looking at the small cap index chart, IWM, below, we can see it is stuck in a sideways, consolidative rectangle pattern. Each time it has reached the upper boundary, it has found resistance (supply) and reversed course. The bottom of the rectangle has acted as support as buyers step in to defend those prices when prices test those levels.

 With short-term bullish sentiment rampant and at extreme levels, until we see small caps breaking out to new highs, we need to keep our bullish enthusiasm in check. While we are ripe for a short-term pullback, it would be healthy if it did. It would allow some of the froth to be unwound and likely set up the market to tack on more gains through the balance of the year with a high probability of small caps being brought along for the ride.