Small Caps Reassert Themselves as the Bull Market “Re”-Broadens on Signs of Retail Strength

We have long preached to watch what people do, not what they say. Consumer confidence took a hit last month and that’s understandable. Unemployment is at a 26 year high. So when a surveyor asks a person whose employed how they feel about the state of affairs, but whose neighbor might be out of a job and who just got done hearing another report on how gloomy the economic environment is, that person is apt to say “just horrible.”

But according to Monday’s retail sales report that person is feeling good enough about their personal situation that they have ventured back into shops for clothing and household items and has resumed treating themselves to an occasional meal out. They’re not buying homes or furnishing them yet, but these purchases tend to come later in the recovery cycle.

This news sent the stock market to significant gains on a bump in volume. The major indices have now all broken to fresh recovery highs, but most importantly market participation broadened as small caps led the way with a gain of nearly 3% and the 52 week high list climbed back above 400.

What’s just as encouraging is renewed vigor in the Shanghai Composite, which led the rally worldwide from March through July before embarking upon a difficult correction. That has clearly concluded and the index has its August highs in sight.

Given the market’s performance today we’d again venture into smaller capitalization names, many of which have set up well in constructive bases capable of supporting fresh legs higher. Check out our sister blog for some suggestions.