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Why Small Caps?

Because that's where the money is - or at least will be again sometime soon.

Small-caps [SML] have been selling off so hard that here the upside potential is the greatest. Although small-caps have hit bottom, there are numerous market strategists who are convinced that the small-cap sectors will be out cold for a couple of years at least. As they see it, valuation wise small-caps shot way out of reach, and even though they have corrected sharply, these valuations are still out of whack.

Besides, there is weakness in corporate earnings, the Fed's QE programs are coming to an end and interest rates are about to rise steadily in the near future. All of this is causing a great amount of volatility among the small-cap indexes, which makes their charts look like road maps to oblivion. What triggered the selloffs in small-caps last January, March and April was that they became stretched to the upside too much and too fast.

So smart-money took profits of which there was plenty, and the crowd took that as a signal to bail out, and they sure did in a hurry. Consequently, small-caps got stretched again too much too fast, but this time to the downside.

But when you check this SML index, you'll note that the small-caps are bouncing off the bottom and are gearing up to resume their leadership in the market. Sure, for now the Moving-Average configuration of the SML is still too bearish [green line above the red line] for a sustained rally to kick into gear. But at long last, the MACD momentum bars are attempting to rise above the demarcation line again, and that is a beginning. Also, the SML index has formed a distinct double-bottom, a sign that a rally attempt is in the making.

The NASDAQ 100 index [NDX] is a harbinger of what is about to take place with the cyclicals, especially the techs and a broad range of small and mid-cap sectors. This index surged a too hard and may have to do a bit of a consolidating pullback. But with the strong performance of its MACD momentum bars, the NDX is definitely geared to the upside.

Not only that, the RSI strength indicator is solid in its bullish territory, and the MA lines configuration is about to turn bullish also, as the green line is about to slip below the red.

The commodity market [GTX] has been consolidating since early March and appears to be getting set for a rally, which of course would be beneficial to the small and mid-caps in the market. The MA lines configuration of the GTX [green line below the red] continues in a bullish mode as it has been since last February. The RSI strength indicator remains solid in its bullish territory and the MACD momentum bars appear to be set to do the same, all of which would be a bullish scenario for the market as a whole.

The recent rally started in March of 2009 when the S&P 500 benchmark ended its steep nosedive at the 666 level. Currently sitting at 1900, this index has come back a long way, but whereto from here?

So far this year the market has been stuck within a volatile and relatively narrow sideways trading range, where multiple sectors are still engaged in some pretty sharp rotations. But these rotations working like pistons in an engine, could keep this rally and the bull market going for quite some time ahead. But for now, this market needs a breather.

Check these Troika charts and note that the two bull components [RSP] and [SPXL] have been consolidating since the middle of April, and that is a positive development for the market. The respective MA lines configurations [green lines below the red] are bullish and so are their respective RSI strength indicators. What' still missing are these two indexes' momentum bars above their respective demarcation lines. Once they manage to do that, the market will be able to kick into a sustained rally.

When checking the bear component of this Troika [SPXS] you'll see why the bulls should have no problems getting such a rally started. The MA lines configuration [green line above the red] is as bearish as it can get. The RSI strength indicator remains in bearish territory and the MACD momentum bars are unable to climb over the demarcation line.

No wonder this SPXS keeps digging a deep hole at the bottom of a deep pit.

This "market forecasting" junk-bond canary [JNK] remains as bullish as it has ever been. Its MA lines configuration continues its bullish mode [green line below the red] and its RSI strength indicator is at the top of the bullish territory as well. But the MACD momentum bars could spoil it all. Sitting tight on the demarcation line they can snap either way, which would determine the direction of the market.

The X:X indicator reflects a market with a split personality, for now anyway. Keep in mind that with this thing down is up and up is down as far as the market is concerned. That this index had rallied strongly since early March is still a bearish omen for the market. But it appears that the X:X is in the process of taking a steep nosedive, and that would be bullish. Meanwhile, the MA lines configuration remains strongly bullish [green line below the red] and that is a bearish signal for the market. But note that the RSI strength indicator and MACD momentum bars have slipped into their respective bearish territories, and that is bullish for the market.

Confused enough?

The yellow metal [GOLD] appears to be hanging on to a consolidation mode, even though its MA lines configuration is still bearish [green line above the red.] But with its RSI strength indicator and MACD momentum bars in dead neutral, gold can swing either way.

Oil [WTIC] is in an incredible bullish mode. But this index has shot up too far too fast, and is in need of a consolidating pullback. That both the RSI strength indicator and MACD momentum bars are deep into their respective bullish territories is a big positive for the price of oil. But the fat fly in this sweet ointment is the total merger of the green and red MA lines.

Should the green line rise above the red, the price of oil will come down hard. But should the green line slip below the red, oil will remain in a rally mode.

Adding it all up, the VIX-Bull index [SVXY] is signaling bullish markets ahead. The only negative here is that this index became too enthusiastic and blew a RSI bubble at the top of this chart. This thing could burst and cause a temporary pullback in the market, but the primary bias remains to the upside.

This rally started in March of 2009 when the S&P 500 ended its steep nosedive at the 666 level. With last Friday's close at 1900, the market came back a long way.

But whereto from here?

So far this year, the market has been moving sideways within a relatively narrow and volatile trading range where multiple sectors still are engaged with some pretty wide-swinging rotations. But just the pistons in an engine, these rotations could keep driving the market forward for some time to come.

But for now, this market still needs a breather and that is a good time to just stay on the sidelines with cash ready, observe and wait.

Still, here are some favored ETFs for a trader's quiver.

Leveraged Bull ETFs:

Regional banking 2x (NYSEARCA:KRU), Technology 2x (NYSEARCA:ROM), Russell 2000, 2x (NYSEARCA:UKK), Consumer Services 2x (NYSEARCA:UCC), Retail 3x (NYSEARCA:RETL), DOW 30, 2x (NYSEARCA:DDM), NASDAQ 100, 2x (NYSEARCA:QLD), Technology 3x (NYSEARCA:TECL), NASDAQ 100, 3x (NASDAQ:TQQQ), Russell 2000, 3x (NYSEARCA:TNA), Real Estate 3x (NYSEARCA:DRN), Russell 2000, 2x (NYSEARCA:UWM), Semis 3x (NYSEARCA:SOXL), Mid-Caps 3x (NYSEARCA:MIDU), S&P 500, 3x (NYSEARCA:SPXL), Mid-Caps 2x (NYSEARCA:MVV), DOW 30, 3x (NYSEARCA:UDOW), Mid-Caps 2x (NYSEARCA:SSO), Financials 2x (NYSEARCA:UYG), S&P 500, 3x (UPROW), Financials 3x (NYSEARCA:FAS), India 3x (NYSEARCA:INDL), Energy 3x (NYSEARCA:ERX), Health Care 3x (DRN), Materials 2x (NYSEARCA:UYM), Algerian 2x (NYSEARCA:MLPL), Biotech 2x (NASDAQ:BIB).

Non-Leveraged Long ETF:

India (NYSEARCA:SCIF) (NYSEARCA:INXX) and (NASDAQ:INDY), Semis (NYSEARCA:XSD), Pharma (NYSEARCA:XPH), Transports (BATS:IYT), Small-Caps Dividend (NYSEARCA:DFE) Oil & Gas Exploration (BATS:IEO), Pharma (NYSE:PJP), Semis (NYSEARCA:SMH), Technology (NASDAQ:QTEC), Materials (NYSEARCA:IYM), Industrials (NYSE:RGI), Russell 2000(NASDAQ:VTWV), Small Caps (NYSEARCA:IJR), Technology (NYSEARCA:IYW), Small-Caps (NYSEARCA:SLY).

Leveraged Bear ETFs:

Nat-Gas 3x (NYSEARCA:DGAZ), Emerging Markets 2x (NYSE:EEV), Oil & Gas 2x (NYSEARCA:DUG), DOW 30, 2x (NYSE:DXD), Materials 2x (SMN), Emerging Markets 3x (NYSEARCA:EDZ), S&P 500, 2x (NYSEARCA:SDS), Financials 2x (NYSEARCA:SKF), China 2x (NYSEARCA:FXP), Energy 3x (NYSEARCA:ERY), DOW 30, 3x (NYSEARCA:SDOW), NASDAQ 100, 2x (QID), Russell 2000, 2x (NYSEARCA:TWM), Small-Caps 3x (NYSEARCA:TZA), Russell 2000, 2x (NYSEARCA:SRTY), S&P 500, 3x (NYSEARCA:SPXS), Financials 3x (NYSEARCA:FAZ), Semis 3x (NYSEARCA:SOXS), NASDAQ 100, 3x (NASDAQ:SQQQ), Russell 2000, 3x (SRTY), Small-Caps 2x (TWM), Biotech 2x (NASDAQ:BIS).

Non-Leveraged Short ETFs:

Gold (NYSEARCA:DGZ), Emerging Markets (NYSEARCA:EUM), DOW 30 (NYSE:DOG), S&P 500 (NYSEARCA:SH), NASDAQ 100 (NYSEARCA:PSQ), Russell 2000 (NYSEARCA:RWM), Active Bear (NYSEARCA:HDGE), EAFE (NYSEARCA:EFZ), Oil (NYSEARCA:DNO).

GOOD LUCK!