1/ Time for Small Caps
2/ Keep an Eye on the Banks
3/ Bullish Divergence on KRE
4/ European Weakness
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1/
Time for Small Caps
The $SML index, which represents the small caps of the S&P SmallCap 600, has shown mixed performance in 2024, combining bullish mini-rallies with periods of sideways movement. Influenced by several macroeconomic and market-specific factors, the index may be gaining traction with Trump’s arrival in the White House.
Recent comments from Fed Chairman Jerome Powell suggest a less hawkish stance toward rate cuts, which could benefit smaller companies that tend to be more sensitive to funding costs
Courtesy of StockCharts.com
The index accumulated +2% for the week and, with Friday’s session still to come, everything seems to indicate that we could finally be seeing the index hold the recent break of the 2021 high and target higher levels.
2/
Keep an Eye on the Banks
The financial sector has a significant weight within the S&P SmallCap 600 index, representing approximately 18.85% of the total index. This percentage places it as the largest weighted sector, followed by the industrials (17.65%) and consumer discretionary (14.50%) sectors. The index is designed to reflect the diversity of the U.S. economy at the small-cap level, which includes companies in the financial sector such as regional banks and insurers, among others.
The KBW Bank Index (BKX), which reflects the performance of major U.S. banks, has reached its highest level so far this year and is heading for 2022 highs. It has so far accumulated a gain of just over 90%, after bouncing off the VWAP traced from 2009 lows.
Courtesy of StockCharts.com
3/
Bullish Divergence on KRE
The SPDR S&P Regional Banking ETF (KRE), which focuses on U.S. regional banks, has recently experienced a significant rally, fueled by a favorable political environment following Donald Trump’s victory in the presidential election. This rally has been fueled by expectations of pro-business economic policies, such as financial deregulation, tax cuts, and increased lending activity.
KRE has performed positively in the last quarter, with an increase in value driven by stabilization in the regional banking sector following the deposit crisis of early 2023. Annual returns have been solid, reaching an increase of 29.17% YTD.
Courtesy of StockCharts.com
Technically speaking, the relative strength to market ratio has been showing us a positive divergence, signaling an increase in KRE’s momentum, which has been on the rise since 2023.
KRE offers an attractive option for investors seeking diversified exposure to regional banks, especially if economic stimulus and deregulation policies materialize.
4/
European Weakness
Shifting gears, we now turn our attention to the SPDR EURO STOXX 50 ETF (FEZ), which tracks the EURO STOXX 50 index and reflects the performance of major Eurozone companies.
During 2024, the price of FEZ had shown moderate positive performance. However, we are seeing how since the end of September, the situation has changed and the ETF has not stopped falling and is dangerously close to the $46-$45 area, which would erase the accumulated gains of 2024.
Courtesy of StockCharts.com
The economic weakness in Europe and a slowdown in growth in countries such as France and Germany continues to be a determining factor. Europe faces challenges such as the risk of stagflation and a slowdown in business confidence indices. However, more controlled inflation could be a catalyst for market stabilization.
Technically speaking, we see a negative divergence that marks a loss of momentum in the ETF.
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Originally posted 22nd November 2024
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