As the market's ascent steepens, traders should exercise caution
New York, Jul.22, stock tips .- Before I get started with today’s musings on the markets, allow me to again thank Sam Collins for giving me the opportunity to pitch in for the next two weeks. I look forward to bringing my take on the tape to his valued readers, and I encourage everyone to ask questions and participate in the discussions on the message board below this daily column.
Last week was yet another up week for U.S. stocks, led by the small-capRussell 2000 index, which was higher by 1.35%, compared to the S&P 500, which was up only 0.71%. Both indices recorded fresh all-time highs as the seemingly endless grind continued without much hesitation, albeit at a somewhat slower rate of increase.
Interestingly, the Nasdaq 100 ended the week in the red as a result of disappointing earnings results and guidance of select index components. While I am not raising a full red flag on this fact alone, it is worth noting and paying close attention to in the coming days.
Given that small caps have led the rally off the June lows, let’s take a closer look at the daily chart of the Russell 2000 index. Since mid-April, the index has rallied almost 17% in two stages with key breakouts on May 3 and July 5.
Both breakouts led to breathtaking increases, particularly if one considers the slope of the inclines. As most of my readers know, I often consider the steepness of a slope (increase or decrease on the charts) when analyzing the broader indices as overbought or oversold.
The most recent rally off the June lows has now ripped about 11.4% in 18 trading days, compared to roughly 12% in 24 trading days for the rally off the April lows. In other words, the rallies in the Russell 2000 continue to get steeper, which the majority of the time, ultimately ends in tears for those inclined to chase such moves higher.
As a final note on the Russell 2000, while we have seen broader divergences in market internals for some time, such as declining 52-week highs on the NYSE, the daily charts now too are flashing some small divergences via the MACD oscillator.
I will delve deeper into inter-market analysis (i.e., different asset classes and their correlations and implications on the U.S. equity markets) in coming days, but for now I will state that crosswinds from bond, commodity and credit markets are weighing heavily on equities.
Ultimately, I expect a quick 5% correction in the S&P 500 to arrive sooner rather than later. This will act as an initial mean-reversion move and build the first leg of a first deeper correction for the bionic year that 2013 has been thus far. To be clear, I would not get outright bearish on U.S. stocks until we see a clear one-day bearish reversal on the S&P 500 and Russell 2000. ...