Big cap sentiment is surging as the major indexes rise on Fed hopes. Unfortunately, the big cap indexes hit new highs on very weak volume. Shares only traded above 6 billion shares twice and the average for the week was under that level.

This is the generals leading the charge. The troops are lagging behind. The Russell 2000 actually lost ground for the week while the Dow added 1.5%. The S&P 400 midcaps and S&P 600 small caps also posted losses for the week.

Comparing the large cap S&P A/D with the small cap A/D gives us a clear picture of the divergence. The big cap line set a new high while the small caps remain choppy with no overall trend.

The small cap stocks are supposed to lead the market. They are not currently leading and they are acting as somewhat of an anchor. The small caps are the fund manager sentiment indicator for the market, and they do not appear very excited about it today. We are being led higher by the fear of missing out syndrome and that always affects highly liquid large cap stocks.



The correlation between the Dow and Russell indexes paints a clear picture of the difference in direction. The Russell is barely able to trade sideways while the Dow is surging.


The chip stocks recovered from an early week decline and were instrumental in lifting the Nasdaq higher. The spike on July 1st was related to the blacklist reprieve for Huawei and the post spike decline was realization that some sanctions still existed. The government was not saying it was suddenly business as usual. Tensions eased when Powell spoke and suddenly everything was buyable.


The FAANG stocks, appeared to peak last week. Facebook received good news on Friday and surged out of the pack and Amazon was near a new high ahead of its Prime Day shopping event this week. However, Netflix and Apple were trading sideways. The lack of forward motion was a drag on the Nasdaq. Google continued to rebound but remains well out of the pack.


The Russell is the most critical index this week. The downtrend resistance from September is solid and the index cannot even manage a test.


In contrast the S&P is clearly in breakout mode with a close well above 3,000. Multiple major analysts had 3,000 as a year end target so there is always the worry that fund managers will hedge their long bets in order to capture their gains and preserve their year end bonuses. The average high forecast is 3,100 with one estimate at 3,150. I fear the closer we get to 3,100 the more likely we will see a sustained pause.


Another risk is the low VIX. When the VIX falls below 12 it represents complacency and the lack of fund managers buying protection with options. As you can see on the chart, it can remain here for prolonged periods, but the rebound can be dramatic. Another adage is "when the VIX is low it is time to go." However, with the Fed ready to embark on three rate cuts, I doubt there will be many investors leaving.


I am somewhat bullish for the next couple weeks. I believe the early earnings will be slightly better than expected and since expectations are so low we could get a market boost. However, once we reach August, I would be careful to tighten your stop losses. August is typically the worst month of the year for the markets.

Enter passively and exit aggressively!

Jim Brown

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