Bad breadth

Market BreadthThe Russell 2000 continues to trip and stumble. Over the past six months the small-cap benchmark has fallen 5.4% while the S&P 500 is 6.9% higher – a 12.3% difference. Yesterday the Russell 2000 formed a “death cross” where its 50-day moving average moved below the 200-day moving average. I’ve heard a few explanations for the Russell 2000’s weakness, including a suggestion that investors in these smaller, more vulnerable companies are being proactive and positioning themselves defensively ahead of a Fed move to hike interest rates. That may be the case, but I prefer to see the major indices moving in harmony – it’s a sign of a healthy market. There’s another fly in the bull market ointment: deteriorating internal market breadth. As you can see on the chart above, the number of NYSE stocks trading at their lowest price over the past year is spiking while the widely watched S&P 500 notches one all-time high after another.  I’m long SPY, QQQ and IYH, but keeping one eye affixed on the exit door.

♦ Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog. ♦

 

 

General’s leading, but where are the troops?

Chart of the DayOne gauge of the health of the market is to track how the majority of stocks are trending. So far in 2014 the large-cap S&P 500 has racked up record high after record high, but the small-cap Russell 2000 isn’t following suit. Year-to-date the Russell 2000 (“troops”) is in negative territory while the S&P 500 (“general”) is up 8.2%. Stock market leadership is narrowing – a potential red flag.

This interesting graph from Chart of the Day shows the performance of the Russell 2000 Index going back to 2002. The red line represents overhead resistance, while the green line is support. Taking this longer term perspective, the Russell 2000 is sitting at an important inflection point.

♦ Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog. ♦

Surprisingly strong showing

The market faced a number of headwinds in May – seasonality (“sell in May and go away”), the Presidential Election Cycle (now in its second year where since 1934 the average decline has been 21%) and an aging bull market (more than 5 years old; not many have lasted as long). Traders couldn’t be blamed for thinking that the extremist takeover of Iraq, one of the world’s largest oil producers, which started about three weeks ago might be a catalyst for a market correction. However, instead of rushing for the exit doors investors continued to pour money into US equities in June, especially the stock of small- and mid-cap companies. The market averages we track gained between 5.2% for the Russell 2000 and 0.7% for the Dow Industrial Average. My newsletter runs timing models for the benchmarks charted above – all remained on buy signals throughout June.

♦ Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog.