Hard Not to Notice This Divergence

 | Nov 03, 2013 | 7:00 PM EST  | Comments
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So the banks held strong -- or, at least, JPMorgan Chase (JPM) held and rallied, while the rest of the KBW Bank Index was mostly mixed at best. The good news is that they didn't fall apart -- not yet, at least.

Otherwise, if you've perceived a marked increase in folks scoffing at small-cap stocks, I think you are correct. Two to three weeks ago the Russell 2000 was universally loved, and now it's hard to find anyone who likes the index. I would like to believe this is because folks saw my ratio charts, of the S&P 500 or the Nasdaq against the Russell, but I suspect it is as I have said for a few days now: It's hard not to notice the divergence when the Dow is solidly green and the Russell is firmly in the red.

Once again, here is the updated chart Nasdaq-Russell ratio. You can see the breakout plainly.

In the very near term, with all the finger-pointing at the Russell, you might have missed that it bounced right off the September high.

I am not a fan of the small-caps in general, mostly because we've seen such poor performance out of them in the last month -- likely due to all those small biotech stocks that litter the new-lows list -- but they are getting a little bit oversold down here. We'll have a problem if the Russell can't rally back above 1105 with any gusto.

Keep in mind the uptrend line on the chart has kept every decline in check since the June low. So if the index fails at 1105, I would expect it to come down and tag that level.

This aside, there is a touch of good news to report for the very short term. First, as previously noted, the Nasdaq is registering a moderately oversold condition, as you can see on the Oscillator chart below. Still, I don't think it's a good oversold reading. Keep in mind that the Nasdaq Oscillator hit a lower high in October relative to the July peak, so I expect it will eventually make a lower low before it reaches a "good" oversold condition.

The other minor piece of good news is that, on Friday, we saw a small contraction in the number of stocks making new lows on both the Nasdaq and the NYSE. That came even despite the lower lows on both Nasdaq and the S&P. The 10-day moving average of new highs minus new lows is still heading down, so I consider this new-lows contraction to be a minor positive -- not one that screams at us.

Finally, the other minor positive is that the put-call ratio of the CBOE Volatility Index (VIX) was at 17% Friday. A sub-20% tends to mean that too many are buying calls to bet on a rising VIX -- which, in turn, implies a declining stock market. A low reading on this options ratio, therefore, tends to lead to a short-term broad-market rally. I'm seeing four readings under 20% dating back to the fall of 2012. What is curious is that two of these led to very decent rallies, in January and April, and the others led to short-term pops, followed by more downside action. Right now I'd lean toward the latter scenario.


 

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