Weak US Micro and Small cap stocks a warning of a Market reversal?

The US Indices were all marginally up on Monday with large caps leading the way. The VIX fell back slightly to 15 - it hit 65 intraday on 5 August, its highest level since Covid in 2020. The main indices were; DJIA +0.15%, S&P 500 +0.28% and Nasdaq +0.14% (Mag7 +0.67%). On an equal weighted basis (our measure) the overall market was down -0.61% with small and micro caps bands down with medium and large cap up. Breadth was a soft 42% (range of 12% to 88% over the last six weeks) combined with softer volumes of 7.5b (the average daily volume over the last year of 7.8b, it hit 15bn on Friday 8/20). 

One day returns as follows - equal weight basis: Mag7 +0.7% (TSLA +4.9%, AMZN +1.2%), large cap +0.45%, medium cap +0.4%, small cap -0.5% and micro cap -1.3%. On a 1 and 2 week equal weight basis; Market +0.5% and +4.2%, Mag7 +4% and +9.4%, Large caps +1.5% and +4.3%, Medium cap +2.1% and +5.8%, small cap +0.9% and +5.2% and finally Micro cap -0.4% and +3.2%. 

Our risk monitor remains in favour of the larger cap stocks. Small and Micro stocks performed poorly following the July nonfarm release, although as fear subsided they recovered strongly through the middle of August. Interestingly the Small and Micro cap stocks held up fairly well relative to Large post the August nonfarm figures and Micro have actually outperformed Large stocks over the last week though the Micro stocks were weak both ahead of and after the Fed decision on Wednesday and were very weak yesterday. Medium cap stocks (market cap band of c$5bn to c$15bn) are the best performers over the last week.

Only half of the sectors were in positive territory on Monday. There was no clear trend in the other sectors although it favoured the defensive / Bear sectors more. Continued improvement in the oil price helped Energy stocks.

There was a clear disconnect between large cap and micro cap with large cap outperforming micro cap by 1.7%, micro cap stocks were -1.3%, on the day. This probably signifies the Markets becoming more cautious. As Healthcare contains a high number of micro cap stocks it was hit the hardest. This appears to have been compounded by other concerns as the Healthcare sector as a whole was -2.6% yesterday, with micro Healthcare -3.1%. Consumer Cyclicals were weak overall on Monday but large cap Consumer Cyclicals were the second best performers, driven by auto and auto retailers. Uranium was strong again and is now +24.8% over two weeks.

A notable number of 52 week highs in the following sectors: Basic Materials (Gold and Iron), Consumer Cyclicals (Auto Retailers) Financials across the sector, Industrials (across the sector ex Transport), Real Estate (Residential and Commercials REITs) and Technology (Software and IT Services, Communication and Networking). Notable high volumes across the Market.