Market Insights

The S&P 500 hit a new all-time high yesterday, slightly above its previous record in January.

Many things have changed since that previous peak. Then, stocks drifted upward in a mindless and complacent bubble. Now, they’ve proven themselves with two strong earnings seasons.

Then, investors hadn’t yet digested the possibility of trade wars between the U.S. and foreign countries. Today, they’re looking for the risk to finally start lifting. Then, we had economic growth under 3 percent. Now, it’s over 4 percent.

Then, the impact of tax cuts was a hope. Now it’s a proven reality in terms of hiring and corporate investment.

Something else has changed in a big way since January. Back then, only a handful of very large companies led the S&P 500 to new highs: Facebook (FB), Nvidia (NVDA), Alphabet (GOOGL), etc. But now, we’re seeing just the opposite as investors shun the big names and hunt for value in a wide array of new areas.

Consider these numbers I crunched by exporting data from RadarScreen® to Excel:

• In the last week, the 20 biggest companies in the S&P 500 (based on market capitalization) have risen an average 0.54 percent. (On an unweighted basis.)
• Over the same time period, the 20 smallest companies in the S&P 500 are up  2.3 percent.
• Conclusion: smaller companies are outperforming.

iShares Russell 2000 ETF (IWM) with relative strength indicator.

This chart of the iShares Russell 2000 ETF (IWM) includes TradeStation’s “Relative Strength” prebuilt indicator. It’s using the default settings of comparing the symbol in question to the SPDR S&P 500 ETF (SPY) with a 10-day interval. That means it will be positive when small caps have outperformed the broader market in the previous 10 sessions.

Notice how poor relative strength was back in January when the S&P 500 was making new highs. Notice also how it’s improved since then, and recently turned positive again. That suggests breadth has improved across the market as investors seek profits beyond the biggest and best known names.

Looking forward, we still face the historically quiet and potentially bearish period of late August. Will the S&P 500 break out under those circumstances, or will traders instead focus on the smaller companies that are already running?

No one knows the answer to that question but here are some events that could impact sentiment as we’re waiting to find out:

• Today: A Chinese delegation begins meeting with U.S. Undersecretary of Treasury for International Affairs David Malpass in hope of arranging a broader summit between Washington and Beijing in November. Minutes from the last Federal Reserve meeting are also due at 2 p.m. ET.
• Friday: Fed Chair Jerome Powell speaks at the central bank’s conference in Jackson Hole at 10 a.m. ET. Durable-goods orders are also due int he pre-market.
• Tuesday: Consumer confidence at 10 a.m. ET.
• Wednesday: Revised second-quarter gross domestic product at 8:30 a.m. ET.
• Monday, Sept. 3: Labor Day holiday. (This will push some items off their normal schedule.)
• Tuesday, Sept. 4: The Institute for Supply Management’s manufacturing index at 10 a.m. ET.
• Thursday, Sept. 6: ADP’s private-sector payrolls report.
• Friday, Sept. 7: Monthly non-farm payrolls and unemployment.