Convergence play?

As the S&P and NASDAQ makes new highs, there seems to be less exuberance in the more risk-on small caps. As seen below, the Russell 2000 Index has been mostly trading sideways for 2 months now.

RUT.jpg

There is a significant divergence that has taken place between the large-caps and small-caps, as indicated in the following:

SPX and RUT.jpg

Typically we see one index converge onto the others primary trend. If you believe in a melt up scenario then buying $IWM might be attractive. Otherwise you could see the Russell as an indicator for investor appetite, which seems to be more wary of the “riskier” market components.

I continue to see the Bear case for equities everywhere I look, but Ive lost too much money trying to short this market and will be waiting for a definitive signal to sell on. I keep being reminded that the markets job is to make as many fools as possible, and being short for the last couple months has certainly been a foolish venture.

If you had asked me in December if we would be at new highs by May I would have definitively said “no chance”, yet here we stand: ~25.5% in 4 months.

The hardest part as a trader is disconnecting your fundamental view from that of the price action. Fundamentally I believe we should be selling equities, but the price action doesn’t correspond.

On the convergence between large and small caps, I believe the better bet it to be long small-caps. If we do have a melt up scenario, it seems likely that small-caps catch a bid. Watching the Russell for the break above the trailing 6 month resistance ~1600.

Thanks for reading.

 

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