The stock market got off to an ugly start this week, as the major indices
swiftly erased the gains of last Friday's bounce, and quite a bit more. Tumbling
well below last week's lows, the S&P 500 and Dow Jones Industrial Average
fell 1.9% and 2.1% respectively. The Nasdaq Composite similarly lost 2.0%, but
held on to support of its July 22 low. The small-cap Russell 2000 lost 2.0%, as
the S&P Midcap 400 declined 1.2%. All the main stock market indexes closed
at or near their worst levels of the day, positioning stocks for a bit of
downward pressure on today's open.
The possible silver lining of yesterday's storm clouds is that lighter volume
accompanied the sharp losses. Total volume in the NYSE fell 10%, while volume in
the Nasdaq limped in 3% below the previous day's level. When stocks are trying
to reverse from a sharp downtrend, it's positive when volume dries up on the
"down" days. This tells us that institutions, which are responsible for more
than half of the market's activity on an average day, have not been rushing for
the exit doors whenever stocks pull back. It's important to note that turnover
also declined last Thursday, when the major indices lost a similar percentage to
yesterday. The negative, however, is that market internals were nasty. In both
the NYSE and Nasdaq, declining volume exceeded advancing volume by a margin of
approximately 5 to 1. The selling was broad-based, not confined to just a few
industry sectors.
Since printing their intermediate-term lows on July 15, the major indices
have been attempting to turn their counter-trend bounces into legitimate trend
reversals. Since the bullish reversal that occurred mid-month, the small-cap
Russell 2000 has unequivocally led the pack higher. From their July 15 intraday
lows to their July 23 intraday peaks, the S&P 500 gained 7.6%, the Dow Jones
Industrial Average 8.0%, and the Nasdaq Composite 8.4%. There were pretty
respectable gains in a short period of time. But by comparison, the Russell 2000
zoomed 12.2% higher during the same period. It was also the only index to rally
enough to test resistance of its 50-day MA (though it has since fallen back
below it). Over the past three days, the Russell 2000 has retraced some of its
gains, along with the rest of the major indices, but its current chart pattern
now presents a low-risk buy entry into the small-cap index:
Notice how the Russell 2000 has pulled back to support of both its 10-day
moving average and 20-day exponential moving average, which have converged right
in the vicinity of yesterday's close. The Russell 2000 has also showed relative
strength throughout the pullback of the past three days.
