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The markets have been a little shaky, but let’s take a data-driven approach to evaluate how concerned we should be.
The combination of these 3 indicators gives us an excellent picture for the risk-reward profile right now from a statistical standpoint.
Indicator 1: Microcap / S&P Relative Ratio Rank
It is typically a good sign for an ongoing bull market if participation expands and more stocks participate.
Microcap stocks finally appear to have joined the party recently.
The Microcap / S&P Relative Ratio Rank indicator compares the performance of the smallest capitalized stocks relative to the largest and shows where the ratio is relative to its range over the past 4 months.
When the relative ratio is high, investors are showing risk-on behavior.
When the ratio drops to a low level, they exhibit risk-off behavior.
The chart below highlights all dates when the 10-day average of the Micro Cap / S&P Relative Ratio Rank indicator crossed above 90% while the S&P 500 index was above its 200-day moving average.
The 200-day index average filters for an uptrend in the broader market, while the cross above 90% for the indicator average indicates that small companies are showing greater strength relative to large ones.
The most recent signal occurred on October 3rd.
Historically, this has tended to be a sign that the market will continue to run, albeit with some short-term volatility.
The table below summarizes S&P 500 performance following the signal dates highlighted above.
While the markets can be choppy for up to 1 month, the 1 month onwards timeframe has shown the markets higher over 85% of the time across 1, 2, 3, 6, and 12 months.
So based on Indicator 1, we can expect the market to be choppy until early November after which the odds favor an upside continuation.
But this is just from Indicator 1… let’s look at Indicator 2 and 3 to get a full picture.
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