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Outside voices and views for advisers

Russell 2000 index trying to join record-high party

Small-cap laggards not a big concern as the sector takes a breather

Jun 19, 2014 @ 12:11 pm

By Paul Schatz

dow jones industrial average, s&p 500, russell 2000, stock market, all-time high, record
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(Bloomberg News)

Over the past few months, I have frequently warned that the caution signs being flashed by major stock market indexes are not all in sync. With 32 months passing since the last 10%+ correction, the bearish camp is hoping that age alone will befall this market. But history suggests otherwise.

Historically, major index non-confirmation or divergence is typically a sign of a market about to correct or, in the most extreme cases, the end of a bull market. This behavior was seen at the secular peaks in 2007 and 2000, as well as major peaks in 2011, 1998 and 1990.

(Don't miss: Challenges of an intermediate-term bond bull)

But before you jump to the bearish conclusion, bull market divergence also has led to minor (<10%) declines. The key factor in determining the seriousness of the warning sign is how many other flashing red lights are also active. Today, there are but a few.

In this case, as you know, I believe the bull market is aging , but not dead, and a 10%+ market correction is not around the corner, at least not yet. Rather, I have been waiting for either the major index warning signs to dissipate or many more to pop up and snare the stock market in a 4% to 8% pullback.

THE PARTY

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With the Nasdaq 100 and S&P 400 joining the Dow and S&P 500 at new highs, only the Russell 2000 (pictured) has yet to join the party. The reason I am not overly worried about the small caps lagging is because they have been leading the rally over the past week and very well could challenge their all-time highs before long.

A change in that performance over the coming weeks would cause me to expect a pullback but not much more.

Paul Schatz is president of Heritage Capital

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