I have been asked several times recently about the lackluster Russell 2000, so I thought I would address it here. While I prefer when the Russell is participating and leading, I am more concerned about the breadth of the market.
If the Russell is lagging, but breadth is OK, which is basically the way it has been since the late May low, I am not going to scoff.
The issues arise when the lagging small caps lean on breadth. When their weakness makes breadth underperform -- then it is a problem. Weak breadth is what rolls my indicators over, not a weak Russell.
So, does the ratio of the S&P 500 to the Russell, being this high -- well over 1.9 -- tell us anything? As you can see on the chart below, I have marked two black arrows. Both of those were lows in the market. But all that time spent over 1.9 in 2007 and 2008 was part of a topping process. So no, it doesn't tell us where we are in the cycle. It doesn't tell us if we are at a low or a high.
This is why I am always so focused on breadth. We already have weak small caps, but up until recently breadth has been cruising along, making new highs, well before the indexes joined the fun.
This week breadth has lagged and on Thursday the S&P made a new high and breadth did not. I believe that is a first, since the December low, this has happened. So far, it's only been one day and we had a touch-and-go point back in March, so this could be just a rest. But I think it is worth noting since it is a change.
Let me note that breadth hasn't been weak enough to roll the McClellan Summation Index over, yet. That would require another day or two of weak breadth.
What we do have is the S&P making a new all-time high and a mere 182 stocks making new highs, which is downright pathetic. Think about it like this: The S&P has 500 stocks in it, and we can't even get to 200 new highs? Several weeks ago, I lauded the expansion in new highs. That was early June. Folks weren't ready to be bullish yet, back then. Then, on June 21, we had yet another expansion in stocks making new highs, when the New York Stock Exchange saw 323 new highs. I thought that, too, was a good sign.
But Wednesday had 261 new highs and Thursday, we couldn't even get close to that. Contracting new highs means it is harder to find opportunities on the long side. It's a narrowing, not an expansion of the breadth of the market.
Yet folks are pretty complacent. Lately I've noted on several days that the put/call ratio for exchange-traded funds was under 100%, so I thought I would show you what the 21-day moving average looks like, because it just broke to a lower low and is closing in on the January 2018 low. In fairness, the January 2018 low saw the moving average under 100% and it is not there now, but I think we can all agree that it has gone from "panic" to "complacent" in the last six weeks.