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Large and in Charge

The past few months have been a great time to be part of the markets. Hardly a day goes by without some longstanding Wall Street record being broken.

Whether it's how much a previously monolithic firm has lost in the past quarter, or how many layoffs a firm announces as a percentage of total employees, or how much the market rallied in a two-day period, or last week's headline that the S&P 500 had its biggest weekly gain (+12%) since 1974, we are living in one of the most interesting times in the modern financial era. Your children, grandchildren and even great-grandkids will one day be studying the events leading up to, during, and even what's now still to come in what will be deemed The Second Coming of the Bear of the 2000s. (I suppose we could call it The Beginning of the End, but I'll reserve that headline for an upcoming piece.)

It's been several weeks since I last wrote a column here, so I'd like to update you on the first recommendation I submitted for the site this fall. Let's take a look at the trade I suggested in my inaugural RealMoney piece of Oct. 6, which was to buy large-cap stocks vs. small-cap stocks. I recommending the purchase of the S&P 500 ETF, the SPDR Trust (SPY), and buy selling the Russell 2000 index ETF, the iShares Russell 2000 (IWM), against it. The weekly chart of this spread as it appeared on Oct. 6 follows below:

SPY vs. IWM
Oct. 6
Click here for larger image.
Source: CQG

I argued for the case for a double bottom (against the 2006 lows), stemming from the quick thrust higher after making new multiyear lows just under those same 2006 lows, as well as a likely solid bottom in the slow stochastics and a MACD chart that was close to getting a positive crossover buy signal. I said that over time we would likely see a test of the early-2008 highs (right near 2.0, or in other words, that the value of the spread would move from about 1.75 up to the 2.0 level).

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