On a day when normalcy rules the roost, the broad market indexes exhibit a strong positive correlation. Like slaves tethered together by chains, the S&P 500 Index, Dow Jones Industrials Average, Nasdaq Composite and Russell 2000 Index tend to move tit for tat. While one benchmark may deviate mildly from the rest in the short run, it eventually drags the rest along with it on its new path or is pulled back in line by the combined weight of the others.
Without a doubt, the interesting development from Tuesday’s trading session was the stark outperformance of the Russell 2000. While the S&P 500 and Dow Industrials closed lower on the day and the Nasdaq ticked up 0.26%, the small-cap-laden Russell 2000 surged 1.24% — on high volume, to boot.
Indeed, small caps marched to the beat of their own drum — a bullish one that was struck incessantly for the trading session’s last four hours. The rally propelled the iShares Russell 2000 Index Fund (NYSE:IWM) just north of multi-month resistance at the $82 level.
Click to EnlargeConventionally, relative strength in small caps is viewed as a positive for the market, a sign that risk appetite is on the rise as investors pile into more volatile stocks that could produce quicker profits.
Some may conclude yesterday’s Russell rally was a sign of things to come, a peek at what the bulls have in store. On the other hand, the utter lack of participation in the bullish festivities by the other indexes is a tad concerning. Could it turn out to be a mere one-day aberration void of significance?
Sure. Of course, it may also indicate something more ominous is afoot. Perhaps the Russell is about to be yanked back in line to follow the more neutral path currently trod by its bigger brethren.
Along with other chartists, I’ll be watching for the inevitable resolution to yesterday’s divergence.
At the time of this writing Tyler Craig owned neutral positions on the Russell 2000 (RUT).