Market Outlook: Climbing Into Thin Air

Before I get started with today’s musings on the the markets, allow me go again thank Sam Collins for giving me the opportunity me to pitch in for the next two weeks.  I look forward to bringing my honest takes on the tape to his valued readers over this period of time and in this vein would encourage everyone to ask questions and participate in the discussions on the message board below this daily column.

To the markets we go.  It was yet another up-week for US stocks last week, led by the small cap heavy Russell 2000 index which was higher by more than one percent, compared to the S&P 500 which ended up less than one percent.  Both indices recorded fresh year to date and all-time highs as the seemingly endless grind continued without much hesitation, albeit at a somewhat slower rate of increase.  Interestingly, the Nasdaq 100 ended the week in the red as a result of disappointing earnings results and guidance of select index components.  While I am not yet raising a full red flag on this fact alone, it is worth noting and paying close attention to in the coming days.

spx weekly

Give that small caps have led the rally off the June lows in US stocks, allow me to take a closer look at the daily chart of the Russell 2000 index.  Since mid April the index has now rallied almost 17.00% in two stages with key breakouts on May 3rd and again on July 5th – see the chart below.  Both breakouts led to breathtaking increases, particularly if one considers the slope of the inclines.  As most of my readers know, I often consider the steepness of a slope (increase or decrease on the charts) when analyzing the broader indices as overbought or oversold.  The most recent rally off the June lows has now ripped about 11.40% in eighteen trading days, compared to roughly twelve percent in twenty four trading days for the rally off the April lows.  In other words, the rallies in the Russell 2000 continue to get steeper, which the majority of times ultimately ends in tears for those inclined to chase such markets higher.  As a last note on the Russell 2000, while we have seen broader divergences in market internals for some time, such as declining 52 week highs on the NYSE, the daily charts now too are flashing some small divergences via the MACD oscillator.

rut daily

I will delve deeper into inter-market (different asset classes and their correlations for implications on the US equity markets) analysis in coming days, but for now I will state that cross winds from bond, commodity and credit markets are weighing heavily on equities.  Ultimately I expect a quick five percent correction in the S&P 500 to arrive sooner rather than later, which will act as an initial mean-reversion move and build the first leg of a first deeper correction for the bionic year that 2013 has been thus far.  To be clear, I would not get outright bearish on US stocks until we see a clear one-day bearish reversal on the S&P 500 and Russell 2000.










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