Russell 2000 Warns of a Top Again

Every time the market rallies sharply off of a short-term low, it's the same thing: the bulls getting excited about the upside after the Dow rallies 600-800 points in a matter of a few days. These same guys are never interested in buying as the market is revisiting multi-month or multi-year lows. They only get interested after the sharp rally, wanting to make the bet that the big bull market is once again alive and well.

I will never understand that line of reasoning. It's like betting on a crash after the Dow is already down 2500 points off the highs. It's just not a good bet. It happens once every few decades, and yet there are traders who make that bet every few weeks. Not me. I am not interested in hitting home runs. I hit singles, sometimes a couple a day, and that is just fine for me. Once again, the market generated signals of a short-term top at Tuesday's highs. This isn't necessarily the end of the recovery, but at least signaled a needed pullback. It has already been tradable; for me, just another base hit.

The Russell 2000 (RUT) called this short-term top. Not the durable-goods numbers or renewed worries about the financials. And this isn't the first time it marked a top by filling or almost filling one of its overhead gaps. You may recall it doing so just days ago as it clawed its way back up to its March 6 gap at 681, stalling within a point of that level for three consecutive sessions (March 12-14), and then collapsing 5% into last Monday's lows.

Well, it did it again.

Once again calling the turn this week was the much-maligned and generally ignored Russell 2000 which apparently had its Feb. 29 gap at 705.72 in its sights early this week. On Monday, nobody seemed to notice that the Russell 2000 was surging to that gap, topping out at 705.12, just .60 shy of its target, then pulling back about 1% from there late in the day.

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At the time of publication, Schiller was long SPX, Russell 2000, NDX, Dow and Financial Services mutual funds up to 35% levels, with lots of cash on the sidelines, although holdings can change at any time.

Dr. Harry Schiller is a Registered Investment Advisor with the California Dept. of Corporations. He holds a Series 7 General Securities license as well as a Series 4 Options Principal license. He has been owner and editor of the Short Term Consensus Hotline since 1988. For more information, see www.harryschiller.com. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.