Sunday, May 11, 2014

The World Does Not End Tomorrow

The ongoing divergence between large cap stocks and small cap stocks has momentum traders worried. However, history indicates both large cap and small cap stocks may rally together without a feared large cap melt down occurring.

According to the Bespoke Investment Group, "there have been 15 other periods since the Russell's creation in 1979 when it declined more than 5 percent over 50 trading days, while the S&P was higher.  At least two thirds of the time, the indexes were both positive one month, three months and six months later. There was only one time, in 1981, when the S&P was down more than 10 percent six months later."

A continuing strong economy would suggest a sustainable uptrend for momentum stocks is on the horizon.

But there are also many headwinds the U.S. economy must overcome: uncertainty surrounding the federal government's financial engineering through Quantitative Easing, the Taper, and an increasingly negative labor participation rate to name just a few.

For a bullish scenario to play out I would expect the Russell 2000 (and the Nasdaq) to undercut their respective April lows and then begin a rally that could last through the summer.