I would not consider this a leading index of the economy, stock market or trends. It is not a sign of a slowdown, either. The divergence of the small caps with midcap and large cap simply tells me the institutions are picking favorites. Why should that surprise anyone?
Last year we saw all the markets and sectors move together in unison – correlation was very high. The market is not correlated with equities as much today as we were just a few short months ago (witness the ICJ to see this).
In a crude way, if you were an institution and had to choose between Apple, IBM or Caterpillar vs a small cap – well, I think we know the answer to that question.
I have not seen the Russell 2K outperform much other than during the seasonally strong trends between late November and late January. This year was a great example of that, yet what was the talk in late January?
The Russell needed a correction badly. It had been up 38% (fib number?) since Oct 2, and now that it has pulled in some 4% we have to be worried.
Taking a look at the chart, we see the 20 MA has just been breached but not confirmed, the 50 MA is lower by about 1.3%. The indicators are not totally bearish yet but certainly leaning in that direction, but I will first give the benefit of the doubt to price action.
Looking back to the November swoon that was quick, painful and nasty the index regained the losses in about six sessions.
Category: Market Commentary