Investors are typically encouraged when a greater number of capitalization sizes participate in a rally, observes Sam Stovall, CFRA Research's chief investment strategist in the firm's flagship newsletter, The Outlook.
This is referred to as a broadening of breadth. Rather than just relying on a few behemoth large-cap tech stocks to propel the market higher, it is typically a good sign when mid- and small cap stocks not only join in, but also lead the way.
Technicians have recently been heard to say that if there is a rise in total volume along with an expansion in breadth, that will solidify the argument for a continued move higher. Well, it seems as if they may be getting their wish.
(Editor's note: Sam Stovall will be participating in the MoneyShow Virtual Event. On Tuesday, May 12th, Sam will be discussing "Outlook 2020: Post-Pandemic Pop". Register for FREE.)
Week to date through April 30, while the S&P 500 gained 2.7% in price, the S&P MidCap 400 jumped 6.2% and the S&P SmallCap 600 surged 7.8%, driven by another stimulus package and the gradual reopening of the global economy.
Not only did eight of 11 sectors in the S&P Composite 1500 rise in price WTD, but every sector in the S&P MidCap 400 and SmallCap 600 outpaced its S&P 500 counterpart.
Finally, 84% of the 148 sub-industries in the S&P 1500 gained in price, with all of the top performers hosting market caps that are less than the average for all sub-industries in the 1500.
Should investors continue to “look across the valley,” they will likely be pleased by what they see, since 2021 EPS are projected to show a 28.2% climb for the S&P 500, but a 40.0% jump for the S&P MidCap 400 and a 59.0% surge for the S&P SmallCap 600.
It’s therefore not surprising to see the mid- and small-cap benchmarks trading at discounts to the S&P 500’s P/E ratio, based on forward 12-month EPS estimates.
Representative companies from the list of best S&P 1500 sub-industries are: CNX Resources (CNX), Six Flags (SIX), HollyFrontier Corp. (HFC), Kite Realty Group (KRG), Nabors Industries (NBR), Harley-Davidson (HOG), Brink’s Co. (BCO), and Service Properties Trust (SVC).
