Today’s average investor is probably not thinking that they have a burning desire to buy up small-cap companies right now. But somebody is thinking that way. To be certain the traders that were heavily short the Russell 2000 index probably had a burning desire to cover their positions in the last hour of Tuesday’s session; however, somebody must be thinking more than that. Wednesday’s gains showed signs of continuation in a rally started by little more than Apple (AAPL) hitting its 200-day moving average.*
I am fond of saying that I’d rather be profitable than right if I must choose between the two. It’s my way of reminding myself that I must not argue with obvious evidence in the charts. A good technician knows that charts can imply trends that CAN’T be explained by fundamental reasons, because those reasons have yet to materialize anywhere outside of the more aggressive investors’ suspicions.
So it is with the current market conditions. The stunning reversal late on Tuesday was led by the Russell 2000. The small cap index outpaced the Nasdaq-100, the S&P 500 and the Dow Industrials at one point intraday by almost double on that day. Wednesday’s follow-on move was led by the Nasdaq. When the more risky, indexes leads the other two, it is an indication that investors have increased their appetite for risk. When such a move becomes a trend, it is bullish for markets.
While I am skeptical that any meaningful bull market can be establish for more than a couple months in the current climate, I am equally skeptical that the market will push strongly lower. The action on the Russell is just one reason why. A second reason comes from another indicator that tends to lead out in a trend reversal: the Dow Transportation index.
Long standing Dow Theory includes the comparison of the industrial and transport indexes, with the transports leading the industrials as potential indication of trend. This two-day chart is a long way from signaling a new bullish market. Yet evidence emerged in the way the transportation index significantly outpaced the industrial index in the recent bounce. This is a strong indication that the bearish move is weakened and possibly done for the time being. Whether you or I agree with the logic, the evidence in the chart remains clear that some investors are in a buying mood.
* For a nice treatment of how AAPL’s move influenced the market, click here.