The thing that struck me about today’s stock market action was that the Dow closed down only 0.04% for the day while the Russell 2000 closed down 1.34%. To put this massive divergence in perspective, if the Dow had declined to the same degree as the Russell it would have been down about 200 points – instead it was down 5.
I like watching the small caps because they are a good proxy for investors’ risk appetites. When investors want safety but still want to be in stocks they look to the blue chips. When they want risk they look to the more volatile small caps. So the Russell 2000 can act as a sort of canary in the coal mine of sorts for risk appetite. One day does not a trend make but today’s action was not bullish.
Still, we have some other pretty important divergences that are related, in a way. What we’re really talking about here is breadth. When breadth is good all stocks are going up together; it’s a sign of a healthy trend. When breadth is bad only a handful of stocks are pushing the indexes higher. This is a sign of a weakening trend and it’s what we’re seeing right now.
The chart below shows the S&P 500 Index climbing over the past couple weeks while the percent of stocks in the index that are above their 50-day moving averages has been declining. All this means is that fewer stocks are responsible for pushing the index higher over that time. In other words, breadth has been weakening. Again, this is not bullish.
