October 15th we saw a major low on the S&P 500 of 1820.66 put in before closing at 1862.49. Clearly, on that day someone, maybe the Plunge Protection Team or a huge whale of investor, stepped in and bid futures higher. Stocks have not looked back and the pain trade is higher. Why? Investors have too much cash and shorts sellers have increased bets. Therefore, both groups are struggling to keep up especially with the S&P 500.
The S&P 500 year to date is now up 11.83%. Meanwhile the Russell 2000 which represents small cap stocks is up 1.95%. That is a big divergence and the last time we saw it was 2011 when the S&P 500 closed up 0.00% and the Russell 2000 lost -5.45%. That spread was 5.45% and this spread 9.88%.
We have noted that since November of 2012, we have been in a really nice up cycle moving from 1343.35 to yesterday’s close at 2067.03. Within this up cycle, there have now been nine up and down moves of significance.
The October finished down move was the sharpest decline since we began the current up cycle. The down move was -7.40%. The next closest was -5.76% which happened twice. We have been in a new up cycle for a bit more than a month and the talk of a pullback continues to grow. A week later the question remains, “Should we be concerned?”
In less than a month, we have already moved more than the typical up move, 8.95%. The move is now 10.98%. So the conclusion is the easy money is in and now the challenge of the S&P 500 is to move above the best move seen at the same time last year, 11.59%. A big plus is that the S&P 500 has moved above its 200 and 50 day moving averages.
The red headed step child remains the Russell 2000. It is above the key moving averages noted in the paragraph above. However, it has now put in several closes above its September high of 1183.85. Two weeks ago the Russell 2000 closed at 1186.47. Yesterday it closed at 1186.94. The Russell 2000 has become like the little red engine, “I think I can, I think I can.” A breakout here would unleash the power within. Watch closely for some Thanksgiving magic instead of some turkey and stuffing.
The conclusion is we are more bullish here a week later but the models tell us this move still has the potential to be a head fake though each higher closes lowers that chance.
It should be noted the last two weeks we have noted that the S&P 400 Mid Cap index had yet to take out its September closing high as well, 1442.81. Today it closed at 1453.72.