What surging small-cap stocks say about a new uptrend

Small stocks have come storming back.

As a result, Dean showed that the ratio between small and large stocks surged to the highest level possible relative to its recent range. A trading model that monitors this relationship triggered a new buy signal last week.

Since the June low, the Russell 2000 is up 16%, while the S&P 500 has managed to gain 13%. Historically, small-cap stocks have performed better than large-cap stocks in the initial stages of a new cyclical uptrend, so this should be a welcome development.

As Dean noted, a trading model that measures when small-cap stocks reverse from underperforming to outperforming relative to large-cap stocks issued a new buy signal. This model is one component of a larger system I track that looks for confirmations of new uptrends.

The Small Cap/S&P 500 Relative Ratio Rank signal triggers when the ratio between them reverses from the bottom of its multi-month range to near the top.

The resurgence in more economically-sensitive stocks provides a tailwind for the overall market. Similar setups to what we're seeing now have preceded rising prices for the S&P 500 and the Russell 2000, with solid risk/reward profiles and z-scores across all time frames.