It’s been hard to miss the news that the stock market is hitting higher prices than ever lately. The Standard and Poor’s 500, the Dow Jones Industrial Average, the NASDAQ Composite – each one of the closely watched measures is higher than ever, a feat mentioned and championed in the financial media every hour on the hour.
Even the President of the United States brings it up quite a bit on Twitter these days as if he might be the individual most responsible for the good news.
So what’s up – or “not up” might be more appropriate – with the Russell 2000 Index? That’s the one that tracks the price of the smaller capitalization equities, the one that’s nowhere near all time highs. The difference between this index and the other majors is what you would have to call substantial.
Let me show you what I mean.
Here’s the weekly price chart of the S&P 500:
Standard & Poor’s 500 weekly price chart, 11 4 19.
You can see how this index is higher than its mid-summer, 2018 peak and higher than previous highs from this year.
And here’s the weekly price chart of the Russell 2000:
Russell 2000 weekly price chart, 11 4 19.
The small cap index is unable to move above the 2018 peak and has only just now matched the earlier 2019 high. I’ve red circled the distance it must travel to match the new highs seen in the other measures.
You can see how the S&P is higher than ever and how the Russell is unable to get there – at least, so far. In the world of price chart analysts, this is known as a divergence. A negative divergence. It may be a sign of a problem with the extent of bullish sentiment now being expressed about “the stock market.”
Maybe it’s some kind of aberration, right? Well, here’s the problem: a key indicator seems to confirm that “divergent” is the right term. If you track the weekly number of stocks advancing in price versus number of stocks in declines, you get a chart that looks like this:
NYSE advance/decline weekly chart, 11 4 19.
The NYSE advance/decline line peaked at the beginning of the year as stocks rallied off the Christmas Eve lows of 2018. So, even though the S&P 500 and the NASDAQ Composite have continued onward to higher highs through the year, it’s been on steadily fewer number of stocks coming along for the ride.
None of this means that stocks can’t continue to rally. The tone here is that maybe investors might want to at least begin to curb the bullish enthusiasm. It may be that the Russell 2000 small caps want to catch up at some point – or it may be that the major indices will first take a pause and back off for some period of time.
Lots of possibilities, as usual.
Stats courtesy of FinViz.com.
I do not hold positions in these investments. No recommendations are made one way or the other. If you’re an investor, you’d want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.