How many times have you seen a chart comparing large caps to small caps in the last week or so? My guess is you can cite the statistics, without even looking, since you have seen it so often.
I have noted it, as well. I have discussed the poor breadth. Recall how unimpressed I was with last week's rally. I showed how poor breadth has been. But I thought of this Tuesday, as I saw what seemed like the 50th chart on the subject and then did the math myself on how large this divergence has become.
The chart of the S&P 500 relative to the Russell 2000 has reached a smidgen over where it was in March of 2020. And it hasn't been this high since 2002. At that point it was on its was on its way down from 3.40 (it is currently just shy of 2.40).
So I checked the date of the peak and was surprised to discover it was in the spring of 1999, not at the peak of the market in the spring of 2000.
Let me stop and provide a little historical context first. The market tanked in the fall of 1998 on concerns over long term capital management and the systemic risk it was thought to have. The Fed stepped in and the market got saved. Then in 1999 we started to fret over "Y2K" -- yes, everyone was talking about the year 2000 -- and the Fed decided it should pump money in and the madness of crowds took over and we had the tech bubble. That bubble burst in March of 2000.
In any event, that 1998 low was the beginning of a massive divergence in the market that lasted until the spring of 2000. So when we discuss divergences, understand they can last a long time before the indexes finally care about them.
But now look at the chart and see that green arrow, right around the 2.40 area? That was the low in the market in October 2002-four years, yes years-after that massive divergence peak. So the divergence that went out of control in 1998 (that's the lift off you see on the chart, heading toward the peak) ended in the spring of 1999 but the markets did not bottom until the fall of 2002.
I bring all of this up because the Russell is once again flirting with that 1720-1730 area we looked at last week. If it breaks, I suspect sentiment gets quite bearish in a hurry, regardless of what the big caps do.
In the meantime the indicators haven't changed. The McClellan Summation Index is still heading down. The new lows are still expanding and we're heading toward an intermediate-term overbought condition this week.
Maybe the Fed will say or do something to soothe the market, but the Daily Sentiment Index (DSI) for the Volatility Index only moved up to 21, so any rally in stocks is going to slip that reading right back into the yellow zone. I still think we will see more volatility even if we rally again this week.
