The Small Caps (Russell 2000), which have been market leaders, have led this mini correction. RUT is now nearing a point – by the 50 day moving averages and by RSI – that has limited all previous pullbacks. Watch RUT as a signal to a traditional bullish late December into January or the opposite, a more severe correction. A breakdown from the MA 50’s would break the mechanical trend of the bull of the last year.
The Banks vs. the S&P 500 (BKX-SPX) is still intact above the moving averages. It made an ugly candle yesterday however, and is just above important moving averages. BKX-SPX has also been a leader to the bull run out of last year’s Fiscal Cliff drama.
The junk bond fund HYG is still lofty, implying that speculation is alive and well.
Junk vs. Investment Grade shows no signs of cracking.
Junk vs. long-term T bonds is also very intact.
The VIX has not yet made a bounce to match any of the previous 5 instances. The S&P 500 has not really pulled back much. One would think that if it is to mimic the previous 5 corrections – bringing the VIX to at least 18 – that the Small Caps would have additional problems, breaking the RUT down from the 50 day averages noted above.
Finally, the Equity Put/Call Ratio shows that market participants are generally asleep at the switch and perceiving little risk in owning equities. The question however is whether the current support for the 10 week moving average of the CPCE is going to limit the complacency or whether there will be one more burst of bullish joy to match early 2011.
Risk remains ‘on’, which has in my opinion been a result of monetary policy that has succeeded in promoting equity asset price appreciation under the guise of fixing the employment situation, among other economic components.
The stage is set for a year end pop as things stand now. The current correction appears to be reloading for another (perhaps final) drive higher in stocks. However, a breakdown in the RUT and/or the BKX-SPX ratio would be a warning that the 1 year old bull rally could be over already.
If it looks like risk will remain ‘on’, I will be seeking to buy or buy back a few items for a rally into January. If it looks like it is going to go south, anything can and probably would be sold, including any remaining open trades that have been noted in NFTRH.