Date: June 12, 2014

Russell Trying to Join Party

Over the past few months I have often warned about the caution signs being given by the major stock market indices not all being in sync together. With 32 months passing since the last 10%+ correction, the bearish camp is hoping that age alone will befall this market. History suggests otherwise.

Historically, major index non confirmation or divergence is typically a sign of a market about to correct or in the most extreme cases, the end of a bull market. This behavior was seen at the secular peaks in 2007 and 2000 as well as major peaks in 2011, 1998 and 1990. But before you jump to the bearish conclusion, it was also seen other times during bull markets that led to only minor (<10%) declines. The key factor in determining the seriousness of the warning sign is how many other flashing red lights are also active. Today, there are but a few.

In this case, as you know, I believe the bull market is aging, but not dead, and a 10%+ market correction is not around the corner, at least not yet. Rather, I have been waiting for either the major index warning signs to dissipate or many more to pop up and snare the stock market in a 4-8% pullback.

With the Nasdaq 100 and S&P 400 joining the Dow and S&P at new highs, only the Russell 2000 (seen below) is left to join the party. The reason I am not overly worried about the small caps lagging is because they have been leading the rally over the past week and very well could challenge their all time highs before long. A change in that performance over the coming weeks would cause me to expect a pullback but not much more.


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Paul Schatz, President, Heritage Capital