Trading This Rare Market Moment

There is a rare divergence going on in the market.

This is only the third instance in 17 years that the Russell has made new 52-week highs for two consecutive weeks without the Nasdaq participating or confirming.

The last instance marked the first quarter 2004 high, when stocks started a selloff that lasted for almost seven months; the other instance was in June 1993, just prior to a 10% move higher in both indices.

So based upon these limited observations, I am not sure what to make of the Russell's outperformance.

How about a relative comparison between the Russell 2000 and Nasdaq?

The chart below compares the price of the Russell 2000 in the top panel to the price of the Nasdaq in the middle. The indicator is in the bottom panel, and it shows the significant and persistent outperformance of the large-cap Nasdaq from 1989 until 2000. Since then, the small-caps have been the place to be -- and from the looks of the shaded area, the Russell 2000 is just about to break out relative to the Nasdaq.

Click here for larger image.

Source: TheTechnicalTake.com

How about a comparison of small-caps to large-caps?

In this instance, I am comparing the Russell 2000 (small-cap) to the Russell 1000 (large-cap). This is shown below (where the data for the indices is hidden), and small-caps are making new all-time highs relative to large-caps. This is significant.

Click here for larger image.

Source: TheTechnicalTake.com

Furthermore, multiple Fibonacci projections suggest that prices on the Russell 2000 can get to the 765 level. This is almost 8% away.

But there's so little precedent for this setup that I can't reconcile a nearly outright bearish posture towards the Nasdaq vs. an almost overly enthusiastic posture on the Russell 2000.

---

At the time of publication, Lerner was long Petroleum Development, although holdings can change at any time.

Lerner is an anesthesiologist and freelance writer who trades for his own account. He blends technical and fundamental analysis to find factors that lead to sustainable moves in the markets. Lerner's approach is research-driven and focuses on supply-demand issues, investor sentiment, intermarket relationships and monetary liquidity. He is a member of the Market Technicians Association and is the founder of TheTechnicalTake.com, a Web site that offers content, commentary and strategies for investors and traders. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. He appreciates your feedback and invites you to send your comments by clicking here.