Somethin’ is Afoot in Small Caps

by Tyler Craig on September 5, 2012

On a day when normalcy rules the roost, the broad market indexes exhibit a strong positive correlation.  Like slaves tethered together by chains the S&P 500 Index, Dow Jones Industrial Average, Nasdaq Composite, and Russell 2000 Index tend to move tit for tat.  While one Index may deviate mildly from the rest in the short-run, it eventually drags the rest along with it on its new path or is pulled back in line by the combined weight of the others.

Without a doubt the interesting development from Tuesday’s trading session was the stark outperformance of the Russell 2000 Index.  While its brethren closed lower on the day, the small-cap laden index surged 1.24% on high volume to boot.  Indeed, small caps marched to the beat of their own drum – a bullish one that was struck incessantly for the last four hours of the trading session.   The rally propelled the ISHARES Russell 2000 Index Fund (IWM) just north of multi-month resistance at the $82 level.

Conventionally relative strength in small caps is viewed as a positive for the market, a sign that risk appetite is on the rise as investors are piling into more volatile stocks that could produce quicker profits.  Some may conclude yesterday’s Russell rally was a sign of things to come, a peek at what the bulls have in store.  On the other hand, the utter lack of participation in the bullish festivities by the other indexes is a tad concerning.  Could it turn out to be a mere one-day aberration void of significance?  Sure.  Of course, it may also indicate something more ominous is afoot. Perhaps the Russell is about to be yanked back in-line to follow the more neutral path currently being trod by its bigger brethren.

Along with other chartists I’ll be watching for the inevitable resolution to yesterday’s divergence.

[Source:  MachTrader]

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