Small cap stocks, India, Japan are on fire

by Troy

Small caps

Sector rotation is pushing the stock market higher, with previous laggards such as small caps, financials, and energy stocks rebounding sharply. To put this into perspective, notice the Russell 2000’s massive outperformance since September 23:

The following chart illustrates performance for 4 major indices from the March bottom-present. As you can see, initially the NASDAQ outperformed other sectors. But now, the Russell 2000 is racing ahead. Such has been the dominant theme in 2020: traders all jump on the same bandwagons at the same time, pushing existing trends to extreme conditions. Traders jumped on the gold trend, then the tech stock trend, then the Bitcoin trend, then the IPO trend, and now the small cap trend:

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As a result, a near record % of Russell 2000 stocks are in a long term uptrend (i.e. above their 200 dma):

No bull market rally lasts forever. When this happened in the past, small caps’ short term rally was typically exhausted. The Russell 2000 faced short term losses over the next few weeks and months, followed by more gains over the next 6+ months:

India

Bond king Jeff Gundlach is very long term bullish on India, predicting that India is where China was 20 years ago. Perhaps this prediction will come true if the U.S.’ actions force an increasing number of manufacturers out of China and into other low-cost countries such as India. Regardless, India equities are on fire, with 100% of the Nifty 50 members above their 200 dma:

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This only happened 2 other times: in 2003 and 2009. Both cases marked the start of a multi-year bull market in Indian equities.

Japan

Elsewhere in Asia, Japanese stocks continue to trend higher, with 78% of Nikkei stocks above their 200 dma:

This mostly led to short term pullbacks in Japanese equities:

 

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