Mish’s Daily: David and Goliath or the Small Versus Large Caps

2 years ago 472 views 6 min read

Michele “Mish” Schneider

Director of Trading and Education

MarketGauge.com

Mish’s Daily: David and Goliath or the Small Versus Large Caps

Written by Michele ‘Mish’ Schneider

In the Bible story, David and Goliath represent resilience and overcoming odds.

David, a small sheepherder, places a stone in a sling to hurl at Goliath’s head. David gets a clean hit and Goliath falls. David then uses Goliath’s sword to kill and decapitate the giant.

If we look at the small caps and the large caps as seen through the lens of IWM and QQQ, it certainly has similarities to the parable.

Small caps, like David, have had to overcome odds to show resilience.

In October 2022, both IWM and QQQs bottomed out.

Then, in February 2023, it almost looked like the small caps were ripe to take out the 23-month moving average in blue (or about a 2-year business cycle)…until…the commercial bank crisis.

If you are new to the Daily’s I have written extensively on the 2-year cycle as key this year given the bull run of 2021 and the bear run of 2022.

This year, we knew could be pivotal.

But is it really?

Once the small caps fell from the key resistance, Goliath woke up.

Large caps began to rally, departing from the weakness of the small caps.

QQQs kept going and by May, cleared the 23-month and off it went.

Meanwhile, IWM struggled to hang on to the 80-month or about the 6–8-year business cycle low.

Except for the covid crash, IWM has been above the 6-8 year business cycle low for over a decade.

In fact, we avoided the recession from a technical perspective as not only did that business cycle low hold, but in June the IWM began to run up as well.

Anyway, back to our story.

It seemed that this past week, small caps were once again ripe to run.
Of course, NASDAQ has not stopped. After all, technology, according to market sentiment is the savior of everything…but is it really?

Here is where David v. Goliath comes in.
Small caps once again ran right to the 23-month moving average and closed the week below it.
Now, it may clear it later on this month.
If IWM does clear, we think that will take some thunder from the large caps with another rotation to value, but not necessarily the final blow for QQQs.
However, if IWM cannot clear, then we can begin to speculate that David has slung the rock at NASDAQs giant head. Only this time, they both may fall.
Why might IWM not clear the 23-month MA?
Inflation, Fed hikes, bonds back in vogue, poor earnings, consumers cutting back???
Take your pick.
It is though, too soon to tell.
But let’s end with a potential stone..

Consumer Staples XLP.

As this just cleared the 50-daily moving average, a move over 75.00 could indeed signal that the consumer is shifting away from toys and more towards things they really need.

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