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.
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