Can the Russell Keep Its Hustle?

 | Jun 09, 2017 | 6:00 AM EDT
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A few days ago, I highlighted a minor change in the market, noting that the Russell 2000 had begun to outperform Nasdaq and that no one seemed to notice or care. They were still stuck in the FANGs, ignoring the underlying changes in the market.

Midday on Thursday, I noted again how the Russell 2000 was outperforming. It is very similar to the action in April. If you squint, you can even see a minor higher high (vs. early June) on Thursday.

Of course, I consider this a positive. But can it last? I think it can last another week or so and then I will reassess. As you can see, in late April it peaked and with no warning it headed south with nary an uptick for six or seven weeks. But there is something to be said about this level. The last time we were down at this level on the ratio was the February 2016 low.

For this reason and some others, I think we can expect at least a week or two of not breaking down and outperforming. Markets have memory, and it would seem to me that when a ratio gets stretched as far as this one has, it is meaningful enough for it to remember that the last time it was here, it rallied.

Of course, it doesn't hurt that the bonds sold off (see my column earlier this week on bonds having a Realization Day), which in turn helps the financials rally, which in turn helps the small-caps push upward.

It also doesn't hurt that the dollar has stopped falling for now. I have been wrong expecting a dollar rally, but I still believe it wants to work its way up, if nothing else but to shake out the weak hands. I would be pleased as pie if the Dollar Index could make its way back to that downtrend line (around 98), but it first needs to have more than a pathetic rally.

There is a lot of talk about oil and how low can it go. I see the big support at $45. And yes, I even get that if it breaks under it there will be panic in the air. But I liken oil to a bubble that has burst. In 2008, it surged to $145 and then in early 2016 it fell as low as $26. It has seen the extremes. And typically, after so many extremes, we see a very wide trading range develop, one where breaks to the downside don't last long and breaks to the upside don't last long as everyone has a memory from the big rally (to $140) and the big decline (to $25). So instead it oscillates quite a bit, never really picking up a big trend.

My guess is if oil breaks under $45 we'll have a day or so of panic and then it will rally back into the range again. After all, wasn't that breakout over $54 in December a move that got folks excited and in the end failed to get any traction?

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