We've noted throughout 2010 that the small cap Russell 2000 index (RUT) (IWM) has been a relative outperformer versus the other major indices (QQQQ (DIA) (SPY). Especially when the market rallies recently, the IWM gains ground quicker. Take a look at the following 2010 performance chart -- IWM is blue, QQQQ is yellow, DIA is red, SPY is green.
2010 Performance Chart
You can see the IWM has steadily been above the other indices -- it also "spikes" higher in general when the market rallies. On the flip side, it also looks to come down quicker when we sell off, but still maintains a net edge in yearly gain/loss.
This increased leverage/movement/volatility is priced into the IWM options, so you do pay for the potential gains. For example, my data currently shows the IWM at-the-money August options are priced around a 27% implied volatility. By comparison, QQQQ is around 22%, DIA 19%, and SPY 20%. Some of this increased option premium pricing can be alleviated by buying deeper in-the-money options -- but also of course premium will dissipate as we get closer to expiration.
Take a look at the chart below, you can see the uptrends of the S&P 500 (SPX) (SPY), Nasdaq 100 (NDX) (QQQQ), Dow Jones Industrial Average (DJIA) (DIA) and the Russell 2000 (RUT) (IWM). The Russell is in light blue and stands out from the other major indices, which have moved higher in tandem (although the DJIA in red has shown a bit of relative weakness in April).
We've mentioned this Russell outperformance previously -- it tends to bode well for the market when a small-cap, growth-oriented index is showing relative strength.
Where have we seen this scenario before? Well, it wasn't very long ago -- in January 2010, we tested these areas (see the following chart). Last time around, we spent several days waffling around before a fairly big market reversal occurred. This pushed the VIX from 17.5 all the way to the upper 20s, and the SPX dropped from 1,150 to around 1,050.
So, will history repeat itself this time with a market correction ... or are we going to breakthrough with continued upside in the SPX and decline in the VIX? I would lean to the latter choice - why do I say this? Well, first off the second test of key levels is often the point of breakthrough ... the market has shown resilience to push back up to here. Secondly, we've again cleared a key Fibonacci level that I've discussed before around 1,121. Additionally, the Daily Percent R on the SPX was over 99 on Friday, which is an extremely strong reading. Also, there certainly is skepticism in the air ... yet we had one of the better economic reports in some time last week.
While I rely on various systemized signals for our Index Options Timer trades on (SPY) (QQQQ) and (IWM), which can go in either direction at any time, I would anticipate at this point that we will test 15 on the VIX before we again approach 30.
That title was from the movie '6th Sense', uttered by Haley Joel Osment when he could see ghosts that nobody could see. When it comes to the markets, I sometimes feel the same. Let me explain. The big shot yesterday against the bow, that 18 minutes of intense selling was something noticeable. Tradable? Sure it is, but a good way to get stuck, too. But that was 'so yesterday', as a friend of mine likes to say, so why worry? Tuesday's move intraday was much more than fly by night. This one hurt the bulls badly, and while today was a trivial bounceback, make no mistake there will be more selling behind this. In fact, the resistance near 1110 still is in place, the high Below is a view of the QQQQ, and it shows the move yesterday and today. If Tuesday was just a shakeout, we'll know it soon.
My friend Helene Meisler at www.thestreet.com REAL MONEY says she sees head/shoulders patterns everywhere on every chart. So, I took look at some dailies and sure enough, I can see 'em, too! In fact, there are reverse h/s and longer H/S patterns here. o wonder the markets are confused!
You can see on the following chart that the Russell 2000 as of today's close has separated a bit from the pack. It is slightly up (basically even) for the calendar year thus far. The S&P 500 and DJIA are down a bit over 1%, while the Nasdaq 100 is bringing up the rear, down around 3.5%. This is a reversal from 2009, where the QQQQ had a much larger % gain for the year than the other 3 indices.
The Russell 2000 is designed to be a measure of small market capitalization stocks. If you look at the Top 10 Holdings below (as of 12/31/2009), you can see that is a very diversified security, with only 3% of its assets in the Top 10 Stocks. There are some well-known companies among its largest holdings (COMS) (ETFC) (HGSI) (TUP) among others.
Why are the QQQQs lagging this year? Well, it comes down to the fact that 40% of its assets are basically in 4 stocks (AAPL) (GOOG) (MSFT) (QCOM).
What conclusion can one draw from this 2010 performance thus far? Well, in general, strong performance by small-cap stocks (which tend to be considered "growth" stocks) bodes well for the markets as a whole. Government stimulus efforts towards "small business sized" companies may play a role in this, as well. Additionally, one should be aware that the "big 4" technology names above may NOT lead the market forward this year ... often times the previous leaders become laggards.
Taking a look at the 4 major index ETFs -- SPY for S&P 500, DIA for Dow Jones Industrial Average, QQQQ for Nasdaq 100, and IWM for Russell 2000 -- one can see a clear laggard thus far in 2010 ... the "Qs".
If you examine the price performance change chart covering this calendar year, you can see that the IWM (blue), SPY (green), and DIA (red) are in a similar performance range, while the QQQQ (yellow) has been an underperformer.
What would continued Nasdaq underperformance mean for the markets? Well ... this index is certainly more geared to technology, biotech and growth than the DIA and SPY. But the small-cap Russell 2000 (which has many growth stocks) is also outperforming the Qs, so that is a bit contradictory.
In this case it looks like the weightings of the QQQQ explain the lagging performance. Basically 4 companies, Apple (AAPL), Google (GOOG), Microsoft (MSFT) and Qualcomm (QCOM) comprise over 32% of the holdings as of the latest data. AAPL alone is over a 15% weighting. Thus, the performance of these giant technology bluechips will have a large impact on future QQQQ performance.
This from my friend Fred Goodman at http://www.marketmonograph.com/
"The charts of most indexes are pretty much the same, as they move up and down within the narrow trading range that has confined the market for three weeks. The QQQQ flag is an almost perfectly flat rectangle with two highs at 44.65 and 44.73 and two lows at 42.88 and 42.90. It covers a total of 4.3% from top to bottom.
Thomas Bulkowski in his Encyclopedia of Chart Patterns pointed out that most rectangles end up breaking out in the direction of the trend that was in effect before it formed. This conforms to the findings of Edwards and Magee, who found that roughly 2/3 of flags, pennants and rectangles were continuation patterns rather than reversals.
Bulkowski discovered that the rally following a positive breakout generally continued in that direction and produced a minimum gain equal to the height of the rectangle, or in this case 4.3%. He also found that if the final passage through the rectangle reversed before reaching the trendline, the breakout was almost always in the new direction. So if QQQQ moves up today and reaches its upper trendline, it is likely that an upside breakout will follow.
These are interesting findings, but we must keep in mind that they are average findings -- nothing is ever etched in stone in the stock market.
Click read more for charts and more information
One of the best reads I have each morning is Fred Goodman at http://www.marketmonograph.com/. The last couple of days he put out some good stuff on the recent action in markets, specifically about the gaps. First is from Dec 2, second is from Dec 3.
Charts and more follow, click read more
Thus far in the 4th quarter of 2009, there has been a distinct performance differential between larger and smaller cap stocks. Take a look at the chart below: Yellow is the Dow Industrials ETF (DIA), Green is the S&P 500 ETF (SPY), Grey is the Nasdaq 100 ETF (QQQQ), and Blue is the Russell 2000 ETF (IWM).
You can see that since the beginning of October, 3 of the indexes are up on for the quarter, while the IWM is down around 3% currently. The fact that the DJIA is the top performer and the IWM is the bottom performer indicates that large-capitalization stocks are more in favor currently.
Since smaller-cap stocks tend to do well in an economic growth environment (historically), this may indicate a preference for "safer" big name global companies currently among traders.
SPY, QQQQ, DIA, IWM Performance Chart
