After breaking its November 2012 uptrend on the weekly charts, the S&P 500 remains in oversold bounce mode as it retests 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.
However, if we look toward the small-cap camp — as represented by the Russell 2000 — things look decidedly different.
In short, the Russell looks to be well on its way to a further higher high after reaching a new all-time high Monday.
The ongoing relentless rally in U.S. stocks has led the Russell 2000 small-cap index to snap roughly 5.5% higher over the past nine trading days, and to a new all-time high on a daily closing basis. Stocks continue to distance themselves further (outperformance) 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 ETF (IWM) shows a steady incline off the 2009 lows that has steepened since November 2012.
If we use the parallel lines to compare the year-to-date slope to that of the August 2010-April 2011 rally — which led to a meaningful correction in 2011 — it’s easy to spot the similarities. We might be near a top here, even if the Russell 2000 has another couple of percentage points to rally.
But that’s different than saying 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 to watch the action closely. Also note that tops take time to develop and rarely (if ever) are one-day events.
On the daily chart below, I drew both the IWM in blue as well as the Nasdaq-100-tracking PowerShares QQQ Trust (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 the next few months, I do think that if small caps can keep up this bid, the Q’s might have another 2% or so of upside to visit. However, take any significant one-day bearish reversal seriously.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter here.