So we got that correction I spoke about last week, albeit a bit of a flash-correction. Now it seems to be ‘game on’ again as the major stock indexes surged above their benchmark 50-day average price. Exactly on cue, the bulls came in and bought stocks as they kissed their longer term (150-day) average price, keeping the uptrend intact.
But when markets get too predictable like that, I do start to get suspicious. So let’s look and see if any storm clouds are building on the horizon…
While the benchmark stock indexes (S+P 500, Dow Jones, Nasdaq) keep on trucking upwards, regular readers know I’m watching the smaller company index- the Russell 2000- as my canary in the coalmine; a kind of leading indicator of when this market is due to transition into a bear market.
As Mark Twain famously said, “History doesn’t repeat, but it does rhyme.”
Let me show you why I watch the Russell 2000 (RUT) as a leading indicator. Here’s the chart for RUT in 2007 and early 2008 (curvy blue line is the benchmark 200-day average price line):
As you can see, the RUT broke below the average decisively in July 2007, long before anyone would have even thought of predicting the 2008 crisis. And before 2007 was through, RUT was a goner. And now look in comparison at the chart of a major index- the S+P 500- at the same time period:
As you can see, it wasn’t really until late December 2007 when the S+P broke down decisively. Just like now, the S+P was merrily in an uptrend, bouncing off the long term average line, right through until November 2007.
So the RUT had about a 6-month head start on the main stock indexes, a good little canary. So now let’s look at the RUT today and see if we can see any similarities between now and that chart from 2007:
Our canary is now looking decidedly ‘seared’. It’s not done yet, but the recent shake-up definitely singed its feathers somewhat. If history is any guide, and that’s never 100%, we’re at November 2007.
You will notice that a clear line of support is at 1,100 for the RUT- since November 2013 its been bouncing along that line. And it’s currently at 1,104. RUT needs to hold that 1,100 level for our canary to remain intact.
And even if it does break, there’s still more upside money to be made from the major indexes that remain in an uptrend. Remember, we’re talking months ahead (it was over a year after RUT broke in 2007 that the financial crisis hit hardest). But I’m saying this as just part of our ongoing commitment to our readers: to ensure they NEVER get blindsided again by an event like the 2008 crisis. In fact, I want them (you) to make a fortune from the inevitable bear market when it comes.
The author has an interest in the securities discussed in this article. Source of charts: stockcharts.com
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