The SPX (S&P 500 index) has been on a face-ripping rally since the October 15th lows were identified by STI (Sentiment Timing Index) and we have not really had any kind of breather the entire way up. Perhaps yesterday and today are that breather.
There are so many reasons why we should see a sharp break lower, when looking at the technical picture of this rally. We have bearish divergences on almost all time frames, volume has vanished, the market is overbought to extremes, and short-term sentiment is at extremes.
But nothing seems to be bothering the bulls and every minor pullback is being used as a buying opportunity. Eventually we will head lower, but seasonality is on the side of the bulls and that is all that seems to matter right now.
The real concern for being overly bullish, however, is the small caps or the Russell 2000. They have been lagging for almost six months now, making its last high in July. In September when the SPX made its previous all-time high, the Russell 2000 never even came close and we then saw the largest drop in the SPX in over two years.
The small caps are lagging yet again. They spent about three hours trading above the September highs, which is still some $2+ below the all-time highs and each push higher is being met with sellers.
The biggest issue with the small caps lagging is it questions the true nature of a “risk on” environment. If the small caps have always been looked at as the “risk-on trade” when it was pushing to new highs over the last five years, now that it has been lagging, should it be ignored? I don’t think it should and it is a concern moving forward, unless it fixes itself, and it appears, that won’t be today.
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