Are small caps playing catch up? It would be great if they were, since that has been something I wrote about on these pages two weeks ago. The ratio of the Russell 2000 fund (IWM) to the S&P 500 fund (SPY) is off the lows from two weeks ago -- and if you squint really hard (and maybe get a magnifying glass) you will see it's at its highest level of the month. Still, there is still much work needed before we can claim victory.
We did, however, get a move in the banks. I still think the banks are trying to bottom and it is a process with a lot of fits and starts. And maybe if they do rally enough to get others to like them, we'll see too much love for them, but first we need the hate to dissipate. That might take a rally to well over 80 on the Bank Index.
I have discussed sentiment and have referred to it as complacent. I think folks are complacent when it comes to big-cap stocks, technology in particular. I think when it comes to small caps and especially banks, folks are much more sanguine and bearish.
I had this discussion with someone on Monday when I said I thought what we're seeing is more aversion to stocks. He wanted to know which was more bearish (for stocks) too many bears or too much aversion. I would say aversion, if you are looking for a big up move. At least bears are active in the market. Averse investors aren't interested.
It's not a choice of bullish or bearish. Coming off the December 1974 low in the market we saw aversion and it was in place for years. Stocks had competition in the way of interest rates. The S&P rallied from 60 to around 100 and then spent the next seven years in a gigantic trading range-about 20% wide.
It got scary in early 1978, when it fell out of the range, but it recovered. It teased a breakout later that year only to head back down again. In late 1979 it eked out a higher-high only to give it all back. And so on. To me that's what aversion looks like. That's what folks flocking to Treasuries looks like. And volume drying up is part of it.
I don't know if this market will turn out exactly like that one, but I do know that volume is getting lighter as the days wear on. Aversion is not a "Wall of Worry." It's when folks are content to own bonds and see no reason to like stocks for more than a trade.
So, sure, we might be heading back to an intermediate-term oversold condition. We might see small caps playing some catch up and big caps taking a breather or, heaven forbid, correcting, but I still think we shouldn't get comfortable with the market, be it on the upside of the downside. And with the Daily Sentiment Indicator (DSI) for the Volatility Index back at 13, it's hard to imagine we will not see some volatility come back into the market.
