We spend a lot of time weighing the evidence here at TrendLabs. That’s the job.
Not all data points are created equal. Some carry serious weight. Others are just noise dressed up as headlines.
Over the past few years, plenty of investors missed a historic bull market because they were obsessed with things like government debt, geopolitics, unemployment, and valuations.
We made a different choice. We focused on price trends, sector rotation, and breadth expansion. The weight of the evidence was bullish, so we leaned that way.
That discipline hasn’t changed.
If you ask me what the single most bearish chart in the world is right now, I can show it to you. We discussed it on Friday.
But today is about the other side of the ledger.
Today is about the chart that carries the most bullish implications in the entire market.
And if it resolves higher, it could make it difficult for this bull market to roll over in any meaningful way.
Let’s talk about small-cap financials.
10-Year Base in Banks
There’s a difference between the most bullish chart in the world and the chart with the most bullish implications.
This is the second one.
We’re looking at the small-cap financials Index within the S&P 600 pressing against the upper end of a base that has been forming for nearly a decade.
Ten years of digestion. Ten years of frustration. Ten years of going nowhere.
That kind of compression does not resolve quietly.
If this structure breaks to new all-time highs, it’s going to be difficult to make a structural bearish case for U.S. equities.
We’re talking about a group made up largely of regional banks. These are economically sensitive stocks. They feel tightening credit conditions. They feel recessions.
They feel stress before most groups do.
And they are threatening to break out.
Financials are the largest weighting in the small-cap S&P 600, ahead of industrials, consumer discretionary, technology, and health care.
So if this group expands, it’s not a side show. It becomes a primary engine.
Last week we talked about the S&P 600 itself finally pushing to new all-time highs.
The Russell 2000 has already been there for months. When we overlay the Small-Cap Financials ETF (PSCF) against the Russell 2000, the question becomes obvious.
What powers the next leg higher in small caps?
If financials resolve upward from a decade-long base, that answer gets a lot clearer.
Yes, there are bearish developments we monitor every single day. That’s part of weighing the evidence.
But there have also been powerful bullish shifts taking place beneath the surface, many of which we have outlined in Everybody’s Wrong.
This one stands out.
A clean upside resolution in small-cap financials would signal economic resilience, improving credit conditions, and expanding participation.
It would confirm that risk appetite is alive and well, not deteriorating.
If regional banks are breaking out of 10-year bases, the market is not on the verge of collapse.
It’s preparing for expansion.
All eyes on small-cap financials.
This Week in Everybody’s Wrong
On Monday, we broke down the breakout in health care stocks.
Leadership is expanding, and participation is broadening.
That means more opportunities for us.
On Tuesday, we talked about the NYSE Advance-Decline Line.
More stocks on the world’s most important exchange are moving higher.
This is not what a market on the verge of collapse looks like.
On Wednesday, we wondered whether a weaker dollar is a cause or a symptom of recent stock market price action.
Money is moving all over the world, and investors are hunting emerging markets.
Here’s why it’s a risk-appetite story.
On Thursday, we described a new regime for small-cap stocks.
In a bull market like this, every group gets a turn.
If you’re still anchored to last cycle’s winners, you’re already behind.
On Friday, we weighed the evidence on both sides of the bull-bear divide.
Breadth has improved, emerging markets are breaking out, and small caps are rotating higher.
But rotation beneath the surface is starting to raise some real questions.
On Saturday, Sam Gatlin used the sell-off in speculative growth stocks to show us something about ourselves.
Sam’s always got something useful to say about markets.
And he’s always trying to get better, even if that means being a little uncomfortable sometimes.
Have a great Sunday.
We’ll see you Monday morning…
Stay sharp,
JC Parets, CMT
Founder, TrendLabs