Is The Fall Melt-Up Over? No!

Includes: IJR, IVV, SPY
by: Michael A. Gayed, CFA

"It is better to lead from behind and to put others in front, especially when you celebrate victory when nice things occur. You take the front line when there is danger. Then people will appreciate your leadership." - Nelson Mandela

Just a quick note to followers of my articles. I do apologize for generally starting my articles by stating that I went from calling the Summer Crash on June 8th here on Seeking Alpha (which many would argue the August and September breakdowns in risk assets were) to calling for a Fall Melt-Up in stocks on September 29. I do this only because there are readers of my articles who are unfamiliar with me and my prior analytical work. I simply want to establish credibility and emphasize the consistent theme underlying my articles.

Having said that, despite continued skepticism and many not believing in the call I made before this big move in stocks this month, the Fall Melt-Up appears to be underway with few actually participating in it given conversations I've had with other analysts, managers, and advisors. The natural question to ask now that October is on track for being one of the best months in years for equitie,s is if the Fall Melt-Up is over. To answer this, take a look below at the price ratio of the S&P 600 Small-Cap ETF (NYSEARCA:IJR) relative to the S&P 500 (NYSEARCA:IVV). As a reminder, a rising price ratio means the numerator/IJR is outperforming (up more/down less) the denominator/IVV.

Notice first that Small-Caps peaked relative to Large-Caps in mid-July, and severely broke down sending the ratio to July 2010 levels. The ratio is only just now starting to show an uptrend in leadership. This is very healthy. Small-Cap stocks have higher sensitivity to the domestic economy and are more volatile. The fact that the ratio is only just now starting to show signs of a real uptrend despite what appears to be an extended advance in stocks likely means the Fall Melt-Up is still early, and that the next big rotation will be back into small-cap companies which can lead the market from behind.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.