We believe that most of the time and particularly when there are changes in the primary trend, the market does its best to hide its true intentions and emotions. Yes is may sound a bit bizarre and crazy but sometimes an “unconventional” approach to analysing the markets is required. We essentially use charts as a means to gauge the mood of the market. The typical approach is to analyse the major market indices such as the Dow, S&P, Nasdaq, FTSE, Nikkei, etc. However, we have found that analysis of the major market indices is of limited use, perhaps because everyone else looks at them. We find that the major market indices are too “noisy”, perhaps this is the market’s attempt at throwing us off its tail.
We prefer to look at indices/gauges that few look at and are subject to relatively little noise. Over the years of analysing markets we have found that one of the most reliable set of indices that depicts the underlying momentum or direction of the market is small cap indices. For whatever reason, small cap indices trend remarkably well and once a trend is in place there is relatively little noise. Trends that are hard to depict in large cap indices are considerably easier to observe in small cap indices.
An old trader once told me that the key to understanding financial markets and particularly equity markets is to look at what the foot soldiers (small caps) rather than the generals (large caps). He always came out on top.
