Short-term Outlook:  Neutral  From Feb 26, 1107 SPX

Equity Indicators - Updates and Extremes

Russell 2000 Momentum

On February 25th, we discussed the streak of 9 straight up days in the small-cap Russell 2000 index, which had just been broken by a relatively large decline.

Far from signaling an end to the momentum, we almost always saw that index recover the loss, usually very quickly, and it continued to do well over the next month or so.

It has certainly continued that winning pattern lately, and has now been positive 16 out of the past 18 trading days.

Let's go back 30 years and look for any other time it was able to accomplish such a feat.  The tables below break out the streaks based on whether the index was trading at a new 52-week high at the time (like now) or not.

First, when it was trading at a new high:

 

Russell 2000 Performance After Being Up 16/18 Days And Reaching A New 52-Week High (1979-2010)
Date	1 Week Later	2 Weeks Later	1 Month Later	3 Months Later	6 Months Later	1 Year Later
01/18/80	1.7%	3.3%	2.3%	-17.3%	6.4%	27.6%
06/01/81	-0.8%	0.5%	-2.6%	-11.7%	-11.7%	-20.5%
07/17/85	-0.3%	-1.2%	-2.9%	-6.5%	6.3%	17.1%
02/18/86	0.9%	3.2%	6.0%	8.9%	4.1%	17.7%
02/03/89	-0.4%	0.9%	1.2%	6.4%	12.6%	0.2%
01/18/94	-0.1%	1.6%	1.4%	-6.4%	-7.1%	-3.8%
06/22/95	-1.2%	1.8%	3.2%	10.3%	8.6%	21.0%
02/08/96	0.1%	1.7%	0.5%	8.5%	2.1%	14.0%
09/18/97	0.3%	2.3%	0.6%	-4.5%	6.2%	-18.6%
09/03/03	-1.8%	0.9%	-1.5%	8.4%	17.2%	9.6%
Average	-0.2%	1.5%	0.8%	-0.4%	4.5%	6.4%
% Positive	40%	90%	70%	50%	80%	70%
Any random time...
Average	0.4%	0.6%	1.4%	2.1%	3.6%	4.4%
% Positive	64%	65%	69%	59%	66%	65%

Out of the 10 times it managed to show this kind of momentum and trade at a new high, it had a relatively strong tendency to hesitate over the next week.  Only once did it continue higher by any meaningful amount.

But the pullbacks were short-lived, and by two weeks later the Russell was higher 9 times out of 10, and with a respectable average return.  That momentum tended to carry over into the next week(s) for the most part.

By three months later, it was much more of a toss-up as to whether the index would be up or down.  Also notable is that volatility was very high - every instance but one showed a gain or loss greater than +/- 5%.

Now let's check on those times it enjoyed such winning momentum but was not trading at a high:

 

Russell 2000 Performance After Being Up 16/18 Days And NOT Reaching A New 52-Week High (1979-2010)
Date	1 Week Later	2 Weeks Later	1 Month Later	3 Months Later	6 Months Later	1 Year Later
04/08/82	0.8%	2.4%	3.5%	-6.1%	8.5%	50.2%
01/23/85	2.7%	4.9%	5.8%	2.9%	10.0%	16.2%
02/22/88	2.8%	5.1%	7.5%	5.9%	10.1%	18.7%
05/18/90	1.1%	3.1%	1.8%	-12.0%	-24.9%	3.1%
02/08/91	3.4%	4.4%	8.7%	14.9%	14.2%	38.5%
08/31/94	0.3%	1.0%	-0.5%	-5.1%	-0.5%	17.9%
11/06/98	-2.7%	-1.5%	0.3%	0.7%	11.6%	11.2%
01/11/99	-0.5%	-1.8%	-8.1%	-3.7%	5.8%	15.9%
11/18/99	-0.7%	0.5%	1.1%	18.1%	3.8%	4.2%
06/04/03	0.9%	1.4%	1.1%	13.2%	22.7%	24.6%
Average	0.8%	2.0%	2.1%	2.9%	6.1%	20.0%
% Positive	70%	80%	80%	60%	80%	100%
Any random time...
Average	0.2%	0.4%	0.8%	2.7%	5.5%	10.5%
% Positive	57%	58%	60%	61%	66%	69%

Here the Russell's performance was mostly excellent.  In both the short- and long-term, the index tended to exhibit a continuation of the momentum, and with strong average returns.

This is often a by-product of a market that is emerging from oversold conditions, and buying interest is so eager that we see extreme momentum.  That is one of the strongest buy signals we can see, as we had ample opportunity to discuss last March and April.

Whether our current situation qualifies as having emerged from oversold questions is debatable - we got quite a few of those indications in February, but the index is already trading at a new high.  Based on the tables above, it suggests perhaps a short-term pause, and questionable prospects over the next several months, but at the very least we'll likely see at least one more new high after whatever short-term correction may come.