The key short-term technical indicators that I am watching are the relative strength of small and mid-cap stocks relative to their large cap counterparts. Small and mid caps have been on a tear against large cap stocks. Technicians interpret small cap strength as positive breadth - the broader based the advance, the more bullish momentum there is.
However, a glance at the relative performance of the small cap Russell 2000 ETF (IWM) against the SPX (SPY) shows that small caps are testing a key relative resistance level.
Similarly, mid-cap stocks (MDY) are also testing a relative resistance zone against large caps (SPY):
Late in the game for small caps?
It may be late in the game for the small cap rally. Tim Knight at Slope of Hope wrote in early July and postulated a measured move in the Russell 2000 based on an analog that he identified showing strong similarities between today's market and the market during the 1997-2000 period. Based on that analysis, he believed that the small cap Russell 2000 was in the throes of a final blow-off top [emphasis added]:
I do think, however, that the move from 17 to 18 is the final stage, and the scary part is, I think it could be a rocket-launch one. We are in the final move in which the few remaining bears either commit suicide or just quit trading for the rest of their lives, because the past 4.5 years have been so grinding and discouraging.In a post today, he wrote referred to his previous post and wrote that, since he was current leaning bearish in his positions, that the analog is painfully true so far. He did not reveal what his Russell 2000 target other than to his subscribers. Since I am not a subscribe I have no direct knowledge of his target, but based on an eyeball estimate of his analog charts, it is suggestive of a Russell 2000 target in the 1100-1120 area.
I can also sense the attitude change among both bulls and bears. The obnoxiousness and I-told-you-so disposition of the bulls is soaring, and overconfidence is rampant. And the timbre and tone of Slope is changing as well. In my own self, I have sense a deep and persistent disturbance – and despair – which just tells me what this market has done to me. And looking at stuff like Tesla – hell, yeah, it’s a great car, but Jesus Christ, this stock chart is just comic.
So the good news for the bears is that I seriously think we’re in the final throes of this disgusting insanity. The bad news is that we’re not just a few points away; I think we’re going to enter the final orgiastic bullish spasm which snuffs out the bears once and for all. And then all holy hell is going to break loose. I only hope we’re all still here to enjoy the fun, because witnessing worldwide financial mayhem, at long last, would put a twinkle in my eye.
As Tim pointed out, analogs (flawed as they can be as trading tools) is his area of expertise:
What is there in its place is a supernatural ability to spot analogs. I’m not just talking about charts; I’ve always been strong with analogs. That’s probably why, as a kid, my IQ tests were so misleadingly high; they rely a lot of analogies, and I was amazing at them, so people were led to believe I was really smart. Ha!With the Russell 2000 closing at 1059.88 and the presence of relative resistance in both mid and small caps stocks, it suggests that the risk/reward ratio for the higher beta small and mid-cap stock averages are on borrowed time. If small and mid-caps do fail at these key relative resistance levels, then the stock market will be said to be suffering from bad breadth - and another technical underpinning of this rally will have been removed.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.
5 comments:
Agreed, the small to large cap ratio is one of the best indicators. I believe this is the time to become defensive, as this ratio (e.g. in ETFs IWM:VV) is losing momentum after a long rally.
I agree, this ratio indicates we will have a short-term correction. The small cap to large cap ratio (e.g. in ETFs IWM:VV ratio) is losing momentum after a long rally.
My call is to go defensive now, and wait until this ratio is much lower before taking on risk again.
Isn't the guy a permabear? Doesn't that go a long way to discount his trepidations? He's been wrong for 4 years, but now his high IQ validates his ability to see analogs? Huh? As Ed Seykota said in 'Market Wizards,' "everyone gets what they want out of the market." Sounds like Tim gets to hone his ineffable sense of 'contra mundum.'
In light of the title of your post, I feel compelled to comment. The really odd thing about the current environment is that actual breadth (various A/D lines) show a much healthier view. Look at the Russell 2000 A/D line outperforming the NYSE line, then even more astonishingly, the Naz A/D (which over the longer term almost always goes down) is even outperforming both the Naz 100 A/D line and NYSE since the Nov. low.
In reply to previous comments:
I agree about the comment about actual breadth. However, the fact that small and mid caps are facing relative resistance is suggestive that breadth may roll over soon.
As for the comenmt about Tim Knight being a permabear - the fact that someone who has a bearish bias came to such a bullish forecast for the Russell 2000 is something to take notice of.
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