How Much Higher Can The Small Caps Go?

How Much Higher Can The Small Caps Go?

It was another good week for stocks as the broad outline of a tax reform plan encouraged many on Wall Street that stocks could move even higher. This enthusiasm has spread to the high profile media traders as some were very excited about their new found bullishness.

Individual Investors may have voted before the tax plan hit the tape but in last week’s survey according to AAII the bullish % dropped 6.8% to 33.3%. Many of these bulls moved into the neutral camp.

The S&P futures broke out its thirteen day trading range Friday to close the month on a very strong note. A few more Wall Street firms also raised their S&P targets for the end of the year. As I mentioned at the start of July it is only when most raise their targets that I get concerned. Currently there are a number of firms that are still looking for the S&P 500 to be lower by year end.

Last week the story was again the small cap stocks as the iShares Russell 2000 (IWM) closed the week up 2.7%. Looking back at the last seventeen years of market history there are two periods that I will focus on where the small cap Russell 2000 significantly beat the S&P 500.

In September of 2005 the S&P 500 made higher highs in September (line b) but the Russell 2000 did not before both corrected. From the October lows to the early May 2006 high the Russell 2000 beat the S&P 500 by a wide margin.

The Russell 2000 was up 21.7% from the low to the high the versus just a 11.8% gain in the S&P 500. From the May highs the Russell ended up correcting 14.8% compared to just a 8% pullback in the S&P 500.

For those of you who follow my analysis of the advance/decline lines they did form negative divergences at the early May 2006 highs which warned of a correction. At the October 2007 bull market highs the S&P 500, Dow Industrials and Nasdaq 100 all made new highs but the Russell 2000 had peaked in June.

There was also a distinct period of outperformance from the lows in September 2010 to the high in May of 2011 which is clearly evident in this % change chart.  This is one of my favored ways to spot divergences between various market sectors.

Though both averages were made their correction lows in early July both averages came close to retesting the lows in early September before the start of a powerful rally. From the low to the high in May 2011 the Russell 2000 gained 32.4% compared to just a 21% rally in the S&P 500.

Over the next five months the Russell 2000 dropped 30.8% as it came quite close to the September 2010 lows. In comparison the S&P 500 only declined 21%. The market did not make its low until early October and as I said at the time “Despite rampant bearishness, the Advance/Decline (A/D) lines for major stock indices suggest the formation of a market bottom”. On the rally into the early 2012 highs the S&P 500 did outperform the Russell 2000.

Since the August low the iShares Russell 2000 has gained 9.5% while the Spyder Trust (SPY) is up 4.2%. Friday’s close was above both the monthly and weekly starc+ band. There are Fibonacci projection targets and monthly pivot resistance in the $151-151.50 area.

As I pointed out at the start of the year the yearly pivot resistance for IWM is at $151.07. The width of the weekly trading range (lines a and b) has upside targets in the $152-$154 area with the monthly starc+ band for October at $156.89.

The Russell 2000 A/D line has accelerated to the upside after breaking through resistance, line c, two weeks ago. It is well above its strongly rising WMA. The preliminary new monthly pivot is at $144.95 with the quarterly pivot at $143.60. IWM has been trading above its daily starc+ band for the past three weeks so it is overdue for a pause.

I would look for the IWM to eventually reach the $154-$156 area with possible targets in the $160 area. The first meaningful pullback should allow us to adjust the upside targets,

The Economy

It was a very good week for the economy as while the Chicago Fed National Activity Index dropped sharply because of the hurricane Friday’s Chicago PMI surged to a 29 year high. The chart of the Chicago PMI and the ISM Manufacturing Index look very strong.

Last Tuesday’s Consumer Confidence held up well at 119.80 despite the damage from the hurricanes in Texas and Florida. Durable Goods at 1.7% beat the consensus estimate at 1.5%.

New Home Sales were down a bit while the decline in the Pending Home Sales continued.  For Viper ETF traders the SPDR Homebuilders ETF (XHB) was up 2.9% last week. The final reading on 2nd quarter GDP came in at 3.1% and Friday’s Consumer Sentiment at 95.1 was close to the consensus view.

There is another full economic calendar this week with the PMI and ISM Manufacturing Index on Monday along with Construction Spending. On Wednesday we have the ADP Employment Report as well as the PMI Services and ISM –Non-Manufacturing Index. On Friday we get the monthly jobs report.

Market Wrap

It was another strong quarter for the stock market as the S&P 500 has recorded eight straight quarters of gains and was up 4% in the 3rd quarter.  The Dow Industrials were up 4.9% and the Nasdaq 100 gained 5.1% while the Russell 2000 was up 5.3%.

The Dow Transports were up just 3.3% for the quarter. The iShares Dow Transportation (IYT) closed last week at new all-time highs as the resistance at line a, was overcome. This reaffirmed the Dow Theory buy signal as the SPDR Dow Industrials (DIA) has made a series of new highs in 2017. Viper ETF Investors have been long IYT since the September lows.

The monthly chart of the Spyder Trust (SPY) shows that it closed above the August doji high. There is monthly pivot resistance at $253.79 with the weekly starc+ band at $254.50. The monthly starc+ band is at $258.32.

The rising 20 day EMA is now at $248.18 with the preliminary quarterly pivot at $246.66. The monthly, weekly and daily S&P 500 A/D lines all made new highs in September. The new monthly highs in the spring of 2016, point 1, resulted in my recommendation for those not invested to get into broadly based ETFs or mutual funds.

The weekly chart of the NYSE Composite continues to look very strong after dropping to test the rising 20 week EMA in August. The weekly starc+ band is at 12,318 with the monthly now at 12,554.

There is initial support now at 12,052 and the 20 day EMA with more important at 11.845 and the 20 week EMA. The weekly chart support and starc- band are in the 11,700 area. The weekly NYSE A/D line continues to make new highs which confirms the price action. The weekly OBV has been positive since February and also has made new highs.

What to do? Stocks were stronger last week than I expected as the new highs in the broadest A/D lines like the NYSE and S&P 500 again confirmed the positive market trend. The tax plan as well as the strong economic data has boosted the sentiment on Wall Street.

It will be interesting to see if the AAII survey this week indicates more bullishness from the individual investor as it typically reaches much higher levels before the market tops out. Some may be waiting for confirmation from another good earning’s season which officially starts with Alcoa Corp (AA)) on October 18th.

The Technology Sector Select (XLK), a holding of Viper ETF clients, closed near the week’s highs but needs further gains to breakout to the upside.  The daily trend for yields still points higher but they have reached stronger resistance so a pullback would not be surprising.

Viper ETF traders took partial profits last week in the SPDR S&P Oil & Gas (XOP) as a pullback is looking more likely. Gold closed the week near the lows which was consistent with my recent commodity analysis , and volume was heavy on Friday. ETF traders established two new positions last week.

There have been a number of tech stocks that have done quite well recently while the market seems focused on Apple (AAPL). It has been holding back the QQQ and was the focus of last week’s article “Apple- Correction or Top?”

I continue recommend that Viper Hot Stock traders scale out of long positions at the initial price targets as they sold half the position in Applied Materials (AMAT) which was sharply higher on good volume.

In my Viper ETF Report and the Viper Hot Stocks Report, I provide market analysis twice a week along with specific advice. I will also help you better understand the markets for only $34.95 each per month.

 

Share this ...Share on FacebookTweet about this on TwitterShare on Google+Share on LinkedInEmail this to someoneDigg thisShare on Reddit

Comments

comments

The publishers of this site cannot and does not assess, verify or guarantee the suitability or profitability of any particular investment. The risk of loss in trading stocks, ETFs, and index futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. You bear responsibility for your own investment research and decisions and should seek the advice of a qualified securities professional before making any investment. As an express condition of using this site, you agree not to hold Viper Report, or their employees liable for trading losses, lost profits or other damages resulting from your use of the information contained on this website in any form (web based or email based), and you agree to indemnify and hold Viper Report and their employees harmless from and against any and all claims, losses, liabilities, costs, and expenses (including but not limited to attorneys' fees) arising any violation of this agreement.