Watch the Small-Caps Carefully

 | Jun 26, 2017 | 6:00 AM EDT
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Stock quotes in this article:

IWM

,

QQQ

There are two questions that have popped up with regular frequency in the last few trading days. So, let's take some time to address them.

The first question is about the Russell 2000. I suppose it's because the Russell has done relatively better during the latter part of last week. Recall that about a month ago, I noted the higher low in the ratio of the (IWM) , an ETF to be long the Russell, to the (QQQ) , an ETF to be long the largest Nasdaq names, and I favored the IWM over the QQQs.

We had that big surge right to the downtrend line, where I thought we should see a pullback and then another rally. We got the pullback, and late last week we have witnessed the re-rally part.

I believe there is a window open for the next week or so for this ratio to make another try upward to, or over that line. If it fails to get over this line, I do think it would be an overall negative, not just for the Russell 2000 but the market in general. I realize many will quibble with all sorts of statistics about whether the market is better or worse when the small-caps do better vs large caps, but I am in the camp that says the more the merrier. That means I think the market does better when small-caps enjoy the ride and outperform.

The chart of the Russell 2000 itself might have been helped along by the rebalancing that has taken place in June; it was one of the reasons I thought the Russell would do better a few weeks ago. Just looking at the chart, we see a channel that has kept each rally and each decline contained all year. Until that changes, this pattern should continue.

The other question is on interest rates. As a reminder, it was my view back in the spring that rates were going lower, with a measured target near 2% on the 10-year note. A few weeks ago, I thought we had begun to see far too many folks able to list reasons why rates were going lower; the same folks who gave us reasons why they were going higher in the early part of the year. I still think it's possible we take a quick trip near that 2% level, but there is a support line that comes in just under 2.10%, as you can see.

I

Keep in mind that one of the reasons I thought rates were going lower was due to the action in the Utes. The Utes had no problem moving higher while rates were going up in late February. I call that a divergence with the Utes getting the nod from me.

Therefore, I find it curious that in the last week the Utes have come down quite a bit and rates have barely budged. I believe we're seeing the early signs of a divergence developing. However, until we see a lower low (under 720) there is still a pattern of higher lows. I do believe we should see the pattern play out as I have drawn in blue.

That implies that it may take a while for rates to start heading upward again, but my view is that we are getting late in the decline (in rates).

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