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
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
piece of Oct. 6, which was to
. I recommending the purchase of the
, and buy selling the Russell 2000 index ETF, the
iShares Russell 2000
, against it. The weekly chart of this spread as it appeared on Oct. 6 follows below:
SPY vs. IWM
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).
Little did we know at the time that the spread would move so quickly back up to near our stated target -- in only six weeks. See the zoomed-in daily chart below through this past Friday's close:
SPY vs. IWM
On Nov. 19, this spread closed at a value of 1.97, very close to the January '08 high of 1.996, and essentially hitting our target area. It's pulled back a bit over the past two weeks, and sits just above the trend line starting from the lowest low but beneath the downtrend line from those January highs.
Thus, given this spread's chart position -- caught between both near-term support and resistance -- I would take 50% of the long off now (if you haven't already done so). I believe in locking in profits.
But let's also look at the really long-term picture of this spread. This next chart below shows the cash S&P 500 divided by the cash Russell 2000 index over the past 20 years.
S&P 500 vs. Russell 2000
For the fourth time since 1988, this spread has bottomed somewhere around the 1.75 ratio price. So in the grander scheme of things, I'm very comfortable being long the other 50% of this trade down from where we are (just about 1.75.) This may prove to be a multiyear low, and well worth hanging onto for a major move higher over the next couple of years. And if you're not in this spread yet, you might want to think about using a pullback to get long it.
Viva la large-caps!
Know what you own: Bensignor mentions the major indices. ETFs that track major indices include ProShares Ultra Dow 30 (DDM) - Get Report, ProShares Ultra S&P500 (SSO) - Get Report, ProShares Ultra QQQ (QLD) - Get Report, Diamonds Trust (DIA) - Get Report and ProShares QQQ Trust (QQQQ) .
At the time of publication, Bensignor was long SPY in his own account.
Rick Bensignor is president and chief strategist at Bensignor Strategies, a technical trading advisory firm. The corporation provides macro and micro technical and behavioral perspective across all asset classes, including on-the-fly analysis in real time. Rick was previously chief market strategist at Morgan Stanley Principal Strategies, responsible for providing the firm's proprietary traders with strategic investment and tactical trading ideas. Prior to that, he was the corporation's Institutional Investor-ranked chief technical strategist, overseeing the firm's banner technical research product. He was formerly the head of technical analysis, futures and commodities at Bloomberg, where he was responsible for the product development, sales and marketing of those applications. Before that, he was Morgan Stanley's commodities technical strategist and head of the Institutional Commodities Sales Desk, which followed his 14-year trading career as a broker and independent trader on the floor of several New York futures exchanges.
In addition, Bensignor was an adjunct professor at New York University's School of Professional and Continuing Studies as well as the New York Institute of Finance, where he taught technical analysis and trading courses for five years. He wrote the book
New Thinking in Technical Analysis: Trading Models from the Masters
, and contributed the chapter on futures for
Investor's Business Daily Guide to the Markets
, and has written several articles in the
magazine. He appears regularly on financial news television, and is often quoted in major global financial media.