IJR (iShares Core Small Cap) has been underperforming SPY (S&P 500 Depository Receipts) since the beginning of the year.
You can see this in the indicator at the bottom of the accompanying chart. The blue line is a four-week moving average of the relative strength line dividing IJR by SPY and the orange line is a 12-week average (one month performance versus one quarter). Rising lines signals outperformance by IJR while falling lines point to underperformance. As you can see, both lines have turned convex.
Primary Uptrend
That’s past —how should we think about the present? It’s certainly possible that smalls are due to perk up again after a period of underperformance. This has happened consistently for more than a decade. And the sideways trend since November tells us IJR could eventually be setting up for a substantial run: periods of stability ultimately resolve in runs until the next balance between supply and demand is found at a higher or lower level. And the primary uptrend favors a resolution higher.
Seasonal Weakness
With an eye to buy, I’m sitting tight for the time being. Stocks have been resilient so far but May-October is a seasonally weak period that increases risk. And I’d prefer to see some evidence of conviction buying (big up candles accompanied by heavy volume) before jumping in. IJR doesn’t look like it’s topping but we can’t rule out that possibility just yet.
Good trading, everyone.
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