Category Archives: Commentary

One of the big questions of 2023 has been why small cap stocks have performed so poorly relative to the rest of the market. Typically, smaller capitalized stock show outsized returns when the broad market is rallying as investors take on more risk through exposure to typically higher beta smaller stocks. One of the most popular gauges of risk appetite is the performance of the S&P 600 or Russell 2000 to the S&P 500. When these small cap indices are showing strong relative performance, it’s viewed as a positive market development and a feather in the cap of bulls.

That hasn’t been the case in 2023. While the S&P 500 is up double digits, the S&P 600 has barely climbed 5% in the first half of the year. Many traders and market commentators have observed and pointed out the strength in the mega cap stocks, primarily the likes of Apple, Google, Microsoft, Tesla and Nivida. And while these handful of names have accounted for the lion’s share of the gains in the S&P 500, it doesn’t explain why we are seeing such performance disparity from small caps.

As a technician I’m focused on the supply and demand of the market through the evaluation of price charts. I’m less concerned with “why” a market, sector, or stock did something as it relates to news events or headlines. I prefer to allow the price action to digest those headlines and analyze the resulting changes on the chart.

One chart that’s recently helped me better understand what’s taken place in the lackluster small cap relative performance is looking at market history, specifically the changes in interest rates.

The chart below shows the S&P 600 vs. the S&P 500 since 1995 with the Fed Funds Rate in the bottom panel. What I find really interesting is how it’s actually not that uncommon for small caps to underperform after the Fed has been a raising rate. In fact, each time in the last nearly thirty years, the S&P 600 underperformed when the Fed was nearing the end of their rate hike cycle. Most recently, when the Fed had two more hikes left, small caps peaked relative to large caps. Before that, the Fed had been hiking for several years and squeezed out 3 more hikes after we saw large caps take over in relative strength. Fast forward to today, the S&P 600 has struggled relative to the S&P 500 and the Fed has hiked two more times and now is believed to be in a “pause” with the door still open for them to hike some more.

What does market history tell us about when this trend in small cap under-performance ends? Well historically the Fed has started its cycle of lowering rates before we finally see some reprieve. The three examples shown above ranged from 3 cuts of 75 basis points to 2 cuts of 150 basis points that finally broke the down trend in small vs. large caps. While this is a very small sample size, it does paint a clearer picture and give some degree of explanation to why we haven’t seen stronger performance in small caps this year.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

It’s been a busy couple of weeks with the CMT Association Symposium in New York where I received the Charles H. Dow Award for my paper, 5% Canary, followed by a family vacation, and then attending the NAAIM Conference in Arizona to accept the Founders Award and present on the topic of the paper.

Now that I’m back, I’ve decided to begin posting to Substack some of the content that I share on Twitter. Specifically, the few charts I post publicly from the weekly Thrasher Analytics letter that’s sent to subscribers. For those that are less active on Twitter (as I’ve somewhat become) and are curious what type of analysis and charts are shared in my weekly letter, this will provide a small glimpse into what subscribers receive each week. Posts to the Substack will be shared 24 to 48 hours after subscribers receive the letter.

To subscribe to the Thrasher Analytics Substack, Go Here.

To learn more and subscribe to Thrasher Analytics, Go Here.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

I’m extremely honored to share that I’ve won the Charles H. Dow Award for my paper, The 5% Canary. This is the second time a paper I’ve written has been selected to receive the Dow Award by the CMT Assocation. The 5% Canary focuses on when equity indices decline from 52-week highs and the duration of time it takes to reach a 5% drawdown. When these declines happen quickly the market has shown a continued bearish bias while when the declines are more protracted in duration, the market has often shown strength soon after. Having read about a math problem proposed by Johann Bernoulli in 1696 that sought to discover what type of path an object would need to travel in to go between two points in the quickest amount of time. Inspired by the answer to Bernoulli’s problem, I applied the concept to the financial markets and led to my research that resulted in the conclusions I wrote about in this paper.

About the Charles H. Dow Award from the CMT Assocation:
In 1994 the CMT Association established the Charles H. Dow award to highlight outstanding research in technical analysis. The Award has received over 160 submissions and recognized 26 papers for their excellence. Of the more than two dozen authors/coauthors who have won, eight have gone on to publish books based on their submissions to the Charles H. Dow Award. Winners have presented at the CMT Association’s Annual Symposium, local chapter meetings, and participated in CMT Association podcasts and/or educational web-series.

I am honored to receive this award for the second time, and I am happy to now be able to share my paper publicly.

To read the paper please visit this link: The 5% Canary (Andrew Thrasher)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

Momentum indicators are widely used by most technicians. There’s a wide variety of applications of momentum. Some look at high-low ranges, closing values only, various lookback periods, smoothed values with the inclusion of moving averages. How they are used also varies. Some traders look for extremes in momentum as signs for potential mean-reversion. Others seek divergences, such as with momentum making a lower-high as price makes a high-high. However, one topic regarding momentum indicators that doesn’t get as much attention are ranges. The range that a momentum indicator – and for this post’s purposes we’ll be using the 14-period Relative Strength Index (RSI) – can tell us a lot about what’s going on in the market’s price action.

Ranges can be viewed in various timeframes; my focus today is looking at the weekly chart of the S&P 500 and the 14-week RSI. The focus isn’t on the “overbought” or “oversold” levels of 70 and 30. Instead, we’re more interested in when RSI rises above 60 or falls below 40. Strong momentum often begets continued strength, so when we see momentum staying elevated (outside of extreme levels like getting north of 80 back in January 2018), that’s historically been bullish for price continuing to rise. The opposite has also been true, when RSI is weak, hitting levels under 40, then price is deemed to be in a bearish range and price activity often finds itself in a down trend.

Below is an example using the weekly chart of the S&P 500 since 2000. Let’s unpack what can be learned from this chart:

1. First let’s look at the major bear markets that began in 2000 and 2007. Notice as those down trends developed, the weekly RSI was unable to produce a reading above 60. It wasn’t until the down trends had ended and price began to show strength that we got the first break above 60.
2. This doesn’t just apply to major bear markets. When RSI goes from under 40 to above 60, historically price action has appreciated further. I’ve plotted green arrows when this has occurred. Each move above 60 after being under 40, the shift from a possible bearish range to a potential new bullish range has been a positive sign for the Index.

We can take this concept of ranges a step further and look at a more systematic approach to identifying when the S&P 500 is in a bullish or bearish range based on its 14-week RSI. The chart below goes back to 1980 and turns green when the RSI has spent 3 of the last 4 weeks above 60 and turns red when the opposite occurs, spending 3 of the last 4 weeks under 40. To assist in identifying the ranges we’re looking for when it’s been above or below the noted levels for at least a few weeks rather than just a single week that pierces the threshold and immediately moves away (as we saw in August 2004 and June 2010).

Looking at the far right of the chart, we can see this metric is one that bulls still have left unchecked with regards to the rebound in equities that began in October 2022. Currently the 14-week RSI still hasn’t been able to breach 60 which leaves us still in a bearish range.

By taking a systematic approach to identifying the ranges of momentum, we can run a simple back test to see how the market has performed when in these ranges. The chart below shows difference in performance of when the market is in bullish range (orange line) vs. when in a bearish range (blue line). This isn’t intended to be a trading signal but to provide insight into the condition of the market, based on whether the range momentum finds itself in. And of course… It’s important to note this is not a recommendation to buy or sell and past performance is not indicative of future returns.

By taking a step back and looking at longer-term charts such as the weekly chart examples used above, we can evaluate the ranges of momentum and work towards identifying what kind of market environment we may find ourselves in. The analyst can also play around with different thresholds. 60/40 are the ones I used today but are by no means the only options available and other technicians may find other thresholds for range identification useful.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

There’s a lot going on in the world right now and I’m thankful I don’t need to pretend to be a war general or an Eastern European expert to complete my analysis of the financial markets. Instead, I focus on the data derived from the market and attempt to be as unemotional in its review as possible. In my latest letter for Thrasher Analytics I describe the current market as trying to fly a kite during a hurricane. Sure it will fly for a few seconds until the wind abruptly changes direction and sends the kite back to earth. One of those gusts of wind right now is coming from the fixed income market.

When equity markets begin to correct one of the first places I turn is to bond spreads. Because if bond traders aren’t scared, then the fear showing up in equities is often short-lived. But if bond traders are panicking, then there’s the potential for a more severe and longer-term down trend to show up in equities. In January, when we started seeing stocks weaken, High Yield spreads were still at historically low levels and hadn’t begun to show much concern. That’s unfortunately changed.

As equities continued to move lower into February, both the High Yield Spread (black line) and AAA spread (green line) began to make higher-highs, breaching the prior December peaks. Since then, they have continued to widen as bond traders demand a higher interest payment relative to Treasury’s in order to own the debt.

Let’s take a look at a longer-term view of the bond spread and equity trends. Historically, these two have a negative correlation. As equities go higher, spreads narrow which confirms the bullishness in equities as fixed income have less concern about the bonds relative to Treasury’s. That relationship has now shifted. The 12-month correlation between the BAML Master Option-Adjusted Spread and the S&P 500 has gone positive. As you can see from the blue arrows on the chart below, this hasn’t happened very often. The last three times the spread-equity correlation went positive was during the 4th quarter of ’18, 2014, and 2007.

From here, I’ll be keeping a close eye on the National Financial Conditions Index, a set of data from the Chicago Fed. I’m specifically interested in the Credit and Leverage sub indices. Here’s how the Chicago Fed describes them:

“The nonfinancial leverage subindex of the NFCI best exemplifies how leverage can serve as an early warning signal for financial stress and its potential impact on economic growth. The positive weight assigned to both the household and nonfinancial business leverage measures in this NFCI subindex make it characteristic of the feedback process between the financial and nonfinancial sectors of the economy often referred to as the “financial accelerator.” Increasingly tighter financial conditions are associated with rising risk premiums and declining asset values. The net worth of households and nonfinancial firms is, thus, reduced at the same time that credit tightens. This leads to a period of deleveraging (i.e., debt reduction) across the financial and nonfinancial sectors of the economy and ultimately to lower economic activity.”

As of right now, the NFCI and the Credit and Leverage components remain below zero, which is a good thing. But should they begin to rise, which the Leverage index has begun to slowly do, then the underlying issues being shown by the expanding credit spreads may get confirmed as a bigger deal. Stocks haven’t had a strong start to 2022, at one point last week over 35% of large cap equities were down over 20% and over 10% are off their highs by over 30%.

Fixed income markets are beginning to show some trepidation. Hopefully these conditions don’t persist, I’ll definitely be keeping a close eye on how these spreads change in the coming weeks.

To get more research and commentary like this, check out the weekly Thrasher Analytics letter.

Thrasher Analytics LLC is not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. Rather, Thrasher Analytics LLC relies upon the “publisher’s exclusion” from the definition of “investment adviser” as provided under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. The information contained in our reports, newsletters, or other produced content should be viewed as commercial advertisement and is not intended to be investment advice. The report is not provided to any particular individual with a view toward their individual circumstances. The information contained in our report is not an offer to buy or sell securities. 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.