I have made much of late of the underperformance of the transports and the small-caps. I think for good reason.
The Dow Jones Industrial Average has been our leader of late. Anybody who played this game for more than a season knows that this is not necessarily indicative of a healthy market, particularly when the gains are centered on just a few winners. The Nasdaq Composite, long our champion, actually posted negative performance for the week ended last Friday.
What I think we have to keep an eye is this. The Russell 2000 Small Cap Index has diverged as U.S. dollar valuations have waned, and hopes for corporate tax reform have faded somewhat. The index, after falling 1.2% for the week, however, turned green on Friday, and now faces possible resistance at the 50-day SMA (Simple Moving Average), which is currently 1415. This average had served as staunch support since early June. The index, should the moves made on Friday hold, could have made a triple bottom on the chart that begins with June.
Should this not hold, significant declines could seem apparent. You guys know that I love my Pitchfork models. On such a model that begins with the weakness in March, lower trendline support broke in late July. Now beginning a new model with the mid-July strength suggests support around 1380 for the index. What does that all mean?
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My point is that mixed signals abound for this index. The immediate future of the small caps will be more reliant on the performance of the U.S. dollar versus its peers, and how urgent legislators appear to be in their pursuit of policy concerning the budget, the debt ceiling, tax reform, and infrastructure building. Washington matters to domestic based-firms. Bigly. Volatile future? Rocky road.
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