The message behind our Chart(s) Of The Day today is pretty straightforward. After playing the role of the negatively-diverging whipping boy for the past 10-12 months, yesterday saw an important development for Small Cap and Mid Cap Growth stocks. They say that the most bullish thing a stock can do is go up. Well, we’ll take that one step further and say the most bullish thing a stock can do is go up to new all-time high ground. That is what each of these market segments did yesterday.

Let’s not make things too complicated. This is flat out bullish for these areas…as long as they can maintain the new highs. We hesitate to call them “breakouts” as they have not exactly exploded out of the range. Nevertheless, they are at all-time highs and that is a positive. Furthermore, as we have posted many times in this space, we are big believers in breadth and strong participation as an indicator of a market’s health. Having the Small and Mid caps in the bullish tent, so to speak, would be very healthy.

You may have guessed there was a “but” coming. We don’t want to throw cold water on these “breakouts” but we will note that, though these areas are at new highs and the large caps are not, we are not ready to anoint them with the leadership mantle yet. In the case of the S&P 400 Mid Cap Growth Index, it has made a few new highs over the past few months only to see them immediately fail, at least in the short-term. As for the S&P 600 Small Cap Growth Index, but for a few days at the end of December, this index has been going sideways since last March. And while many would argue that it is simply consolidating its prior 15 months of gains (and it may have been), it certainly has had every chance to truly break out during that period. Consider the fact that, over that same period, the S&P 500 has made some 50 new highs.

On top of that, consider the relative performance of these areas versus the S&P 500. While we are not big fans of “ratio investing”, we find they can be helpful in orienting investors to the leadership and health of the overall market. And relative to the S&P 500, the Small Cap and Mid Cap Growth segments have not yet done enough, in our view, to warrant the “leadership” role.

Each of the respective ratios topped out last March and have trended downward since. Perhaps that will change, we don’t know. We just don’t have enough evidence that these are now areas of leadership.

That said, it does not take away from the new all-time highs. If these areas can maintain these levels – and preferably build on them – over the next few days, it would be a very good sign for them and the broader market in the intermediate-term. At least for now, they cannot be pointed to as the main culprit in holding this market back.

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