NOTE: I will be on vacation for the next week. My next column will be Tuesday, September 4.
I get asked about the move in the Russell 2000 quite often. One reason is that when you look at a chart of the stocks in the Russell that are trading over their 100-day moving average line it is hovering just under 60%.
This is not a statistic or indicator I keep so unfortunately I cannot show you a chart but the chart peaked in January and has been trending lower ever since. Is this a divergence? Of course it is. Just think about the number of stocks making new highs that I harped on earlier this week. Fewer stocks making new highs would be along the same lines as only 60% of stocks trading over their 100-day moving average lines.
I do have a chart of interest though. When we take the 50-day moving average of the Russell and subtract the 200-day moving average line we discover that the spread between the two does not get up to 100 very often. This says more about the index itself, not the individual components. Since 2009 it has tagged the 100-point area only four times, with this past week being the fourth.
Point A on the chart was in March/April of 2011. Let's note a few things. First, it wasn't dire in the near term for the Russell. In fact it went sideways, even made a minor higher high in late April and after a June correction came back up to the same area. So that was four months of milling around before the big plunge in July and August that year.
It came close in 2012-2013 but never got to 100. I suppose if you lived through that decline in 2014-early 2016 for small caps you would think I'm splitting hairs by waiting for 100 but I think 100 is extreme.
Point B was in September/October 2016. At first I thought, that can't be, but then I remembered the nearly 10% slide we had heading into the 2016 election, so it was stretched then as well. This time it happened pretty quickly, there was no waiting. But it was also quite shallow and we then surged over 100.
Point C was January 2017 and quite frankly it's not that the Russell fell apart but you might remember that for the next nine months the Russell was one giant sideways. So that extreme needed quite a bit of digestion in terms of time.
This past week it tagged 100 and turned down a bit. Will this be quick or will it mean a prolonged sideways before a decline or a prolonged sideways before another up move? I can't say from just this chart but I can say that this indicator tells us the spread between the two moving averages is once again extreme.
I saw somewhere that there is a seasonality factor for the small caps, where they tend to rally into early September and then peak and correct again until late October or November. I am not much of a seasonality player but it would be interesting if that pattern turned out to be the case since this moving average spread is stretched and the ratio of small caps to large caps has not yet come down to the level I find they tend to be attractive at.
Away from that, breadth soured on Thursday but hasn't yet moved any of the indicators. The McClellan Summation Index is the closest to turning -- back down again -- in that it will only take another poor breadth day to halt its rise. The good news is that two days ago ETF call buyers had not a care in the world with the put/call ratio for ETFs at 79%. So of course the market stopped going up. Thursday the put buyers were out in full force as this indicator chimed in at 244%. The last two times we had such sky high ratios are marked on the chart of the S&P. Yes I know, both of those were times the market was down and out which it is not now. But it is worth noting.