Small-Caps Score Another Bull's-Eye

 | Dec 13, 2012 | 4:45 PM EST
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In Tuesday's column, I highlighted the Russell 2000 as possibly setting the stage for another near-term top. I explained that the Russell 2000 had marked the Dec. 3 top as it filled its Nov. 7 gap, overrunning it by just a fraction of a point.

I said, "Now, today, it's already working on filling its Oct. 19 gap. So far, it's coming within about 2 points of the top of that gap. If you figure that the last little top on Dec. 3 was marked by the Russell's filling its Nov. 7 gap, it shouldn't come as a big surprise if the top of this current move is marked by the filling of the Oct. 19 gap in the RUT. That gap, as shown below, is at 837.12." So let's look at what happened on Wednesday.

First, we'll take a look from the somewhat bigger-picture perspective, as shown by the six-month chart of Russell 2000. Here you will note that the Russell 2000 took care of business and did so pretty early on as it gapped up to the 837.17 level. That was the opening tick in this index, and with that, the gap at 837.12 was filled. It went a few pennies higher, to the 837.29 level, and that was that. Now it's collapsing to the 822 level, where it has now not only filled Tuesday's gap at 826 but just filled Monday's gap, the Dec. 10 gap, at 822.27. The low so far is 822.22.

I was a seller into the top of the gap on Wednesday, as I had suggested that that level might mark a top. Seems like it was doing just that, so I sold some positions in the Russell 2000 at Rydex at the morning pricing of 835.20, and in so doing, I dropped my invested levels to a range of 20%-40%, which is the lowest invested level I have held in months.

RUT Marks Another Turn

Not only did the Russell 2000 mark that top on Wednesday by filling its gap, later in the day it also warned of trouble ahead. Here's what I mean. If you were following the action on Wednesday, you noticed that after the initial pop, there was a pullback, which, in the case of the Russell 2000, filled its opening gap. But in the S&P 500, the gap wasn't quite filled till later on in the session. After that midmorning dip, the market shot up to new highs (ostensibly, following lots of excitement over the Fed announcement at about 12:30 Eastern time).

In the short-term (three-minute) chart of the S&P 500, below, you will notice that the SPX popped up to new highs for the day -- in fact new multi-week highs at the 1438.59 level. The Dow also popped to new multi-week highs.

SPX Makes a Multi-Week High

But what about the Russell 2000? What was it doing during all of this celebration over the Fed's latest easy-money-policy statement? It wasn't doing much. In fact, it refused to take out the morning highs. That is, it refused to go more than a few pennies above that Oct, 19 (silver anniversary of the Crash of '87) gap that it had just filled. And from there, the RUT has sold off, and sold off hard. It's already filling that gap from Monday at 822.

RUT Short-Term Refuses to Confirm

Oh, there was one other thing that I thought might lead to some weakness over the near term. That was the move in the McClellan Oscillator back to an overbought reading at Tuesday's close. The oscillator closed at +110 on Tuesday. That was another reason to be on the lookout for a near-term top on Wednesday.

As noted above, I cut back in my mutual fund exposure on Wednesday morning, and I'm now back to my lowest invested levels in months. My mutual fund models also exited their buy signals at Tuesday's close. Now I am graded Neutral for the intermediate term, and Timer Digest currently shows my Intermediate Term Model ranked No. 5 among the 100 or so advisers they track.

However, I am not averse to buying further weakness, and in fact, I may re-establish some positions in the Nasdaq-100 at today's close, if that index appears headed for a close near the session lows.

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