After breaking its November 2012 up-trend line on the weekly charts the S&P 500 remains in oversold bounce mode as it re-tests the underbelly of said uptrend. Until the S&P 500 breaks past the 1645 – 1650 area (which is only inches away), this index is thus not showing any leadership. If we look toward the small cap camp as represented by the Russell 2000 however, things look decidedly different. In short, the index looks to be well on its way to a further higher high after reaching a new all-time high on Monday July 8th.
The ongoing relentless rally in US stocks has led the Russell 2000 small capitalization index to snap roughly 5.50 percent higher over the past nine trading days and thus also to an all-time high on a daily closing basis. Stocks continue to distance themselves further (out-performance) from other asset classes such as bonds, commodities and credit, which from a trader’s perspective must be respected.
The weekly chart below of the iShares Russell 2000 Fund (IWM) shows a steady incline off the 2009 lows and has since November 2012 steepened through this longer-term lens. If we compare the year-to-date slope to that of the August 2010-April 2011 rally (note the parallel lines), it’s easy to spot the similarities, which of course eventually led to a meaningful correction in 2011. We may be near a top here, even if the Russell 2000 has another couple of percent to rally, which is different than saying that this is a great time to short the market. Ultimately, price action will need to show us weakness before the short side becomes more attractive. Risk does happen fast however, so it is prudent at this juncture of the multi-year rally to watch the action closely. Also note that tops take time to develop and are rarely if ever one-day events.
On the below daily chart I drew both the iShares Russell 2000 Fund (IWM) in blue as well as the Nasdaq 100 Powershares (QQQ) in red. The leadership displayed by the small caps is clearly obvious as the blue line has broken past resistance. While I don’t expect any major further rally in over the next few months, if small caps can keep up this bid then the Nasdaq 100 Powershares (QQQ) too may have another 2% or so of upside to visit. Important to note however is that any significant one day bearish reversal must be taken serious.