Small Caps Impulse Into A New All-Time High By Urban Carmel
* November 17, 2016
Summary: The small cap index is at a new all-time high today, having gained more than 13% in the past 10 days. That type of price behavior has historically been very bullish. Add to that (a) positive seasonality and (b) bearish sentiment just a few weeks ago, and the odds favor further gains into year end. There's just one thing: strong gains like this usually take place during or right after a bear market low. This makes the current rally to new highs an anomaly, having the slight whiff of euphoric capitulation.
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The Russell 2000 (RUT) index of small cap stocks is at a new all-time high today. This new high is coming after the index has risen more than 13% over the past 10 days.
We think of strong gains in a short period of time as the initiation of a new uptrend. In other words, stocks fall hard into a capitulatory low and then reverse. The strong "impulse" higher from the low means that investors are switching sides and chasing price higher. That momentum most often continues into the weeks ahead. This is how new uptrends typically begin.
That's not always the case; there are exceptions, but there are exceptions to every pattern in the markets. Still, the odds overwhelming favor further upside: according to Ryan Detrick, RUT has risen more than 13% in a 10 day period 21 times before. In all but one, the index was even higher a month later. Since 1991, the median gain was 3%.
Which makes the current rise over the past 10 days an historical anomaly. The chart below looks at prior gains of 13% over 10 days since 1991. All occurred during or after a bear market. In each case, the gain of 13% either started at a significant low or was within a just few weeks one. Enlarge any image by clicking on it.
In comparison, the current rally started 9 months after RUT made a significant low, in February 2016. The index was more than 20% higher than that when the current gain of 13% started on November 3. . .
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