Is The Small-Cap Rally Over-Extended?

No, it's not a trick question...

Despite tumbling fundamentals...

And being the most overbought in 20 years...

Many investors continue to pile into Small Cap stocks in the hope that Trump Tax reform will save the world.

However, as Dana Lyons writes, the current inexorable stock market rally has some folks wondering where it will at least take a breather, if not put the breaks on. The small-cap segment of the market has been particularly relentless, with the Russell 2000 (RUT) up 8 days in a row, 15 of the last 18 and 24 of the last 30. Based on one piece of charting analysis, however, it is now reaching a level that may finally produce at least a pause in its breathless advance.

We’ve discussed Fibonacci Extensions in the past on several occasions. As a refresher, these Extensions mark various magnitudes of potential price support or resistance following range breaks, based upon the Fibonacci mathematical sequence. The 161.8% is perhaps the most important Extension, based on the sequence. It signifies a move of 61.8% of the former range – out of the range.

For example, in this case, we see the Russell 2000 now reaching the vicinity of the 161.8% Fibonacci Extensions of the following noteworthy recent declines. That is, the RUT is now above the top of the declines by a margin equal to approximately 61.8% of the respective ranges of the declines:

  • The 161.8% Fibonacci Extension of the 2015-2016 Decline ~1514
  • The 161.8% Fibonacci Extension of the recent July-August Decline ~1516

Here’s what it looks like on the chart...

So, will the small-cap rally put on the brakes here? There is no guarantee that it will. However, this is as good a spot as any, in our view, for the index to at least take a temporary respite – particularly given the multiple levels aligned in the same vicinity.

Do we think the rally is over? No – it just may be a bit extended in the near-term, though.

If you’re interested in the “all-access” version of Dana's charts and research, please check out the new site, The Lyons Share.

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Finally, as a reminder, the last time the Russell 2000 was this overbought, it did not end well...


Hammer823 TheMexican Thu, 10/05/2017 - 14:00 Permalink

I would say 10 years ago.  But there is no doubt that your fathers "market" no longer exists.What we have now is Central Bank controlled socialism.There is no price discovery or headline risk any longer.Just price manipulation to fund goverment budgets, pad pensions and 401k's and keep the 1% happy.Our entire economy DEPENDS on the stock market.  It used to be the other way around. 

In reply to by TheMexican

GUS100CORRINA TheMexican Thu, 10/05/2017 - 14:51 Permalink

Is The Small-Cap Rally Over-Extended?My response: DAMN RIGHT IT IS!!!!!!! Take a look at the TNA (which I bought for 49 holding my nose over 6 weeks ago on Aug 21st)! I just unloaded it today at 68!!! I am looking at TZA right now.My only regret: Position size was too small!!! NO GUTS, NO GLORY IS WHAT THEY SAY.While it is fun to make money, this ladies and gentlemen is BULLSHIT!!!!!!

In reply to by TheMexican

SpeakerFTD Hammer823 Thu, 10/05/2017 - 14:16 Permalink

That is a very good and concise summary.Eventually the math will overwhelm the CBs.  I would have thought before now, but then  I never thought negative long-term interest rates were possible.  Regardless, you can build a house of cards so high.  When it does all fall apart, it will likely take a generation and a world war to clear the wreckage wrought by the bankers.

In reply to by Hammer823

g3h Thu, 10/05/2017 - 13:59 Permalink

Poor Tyler.  The world is not edning, the market makes one high after another, no crash, not even a 5% drop, which we now call "a correcton".

Fantasy Free E… Thu, 10/05/2017 - 14:16 Permalink

p { margin-bottom: 0.1in; line-height: 120%; }a:link { } When the market is being goosed, it is hard not to include the Russell 2000. The capitalization of the entire index is about the same as one to three Dow components. So, it is hard to goose the Russell just enough to move it a little. The notion that supply will eventually overtake demand and a bear market will ensue is ridiculous. A bear market will not begin until the whole system collapses. The answers to all of these issues are simple. The complex explanations come because the truth is unpleasant. James Quillian Fantasy Free Economics

mjcarr51 Thu, 10/05/2017 - 14:22 Permalink

Each of the last few days, the SPZs have done zippo for the first hour or so, then they start moving higher. They reach some level (2548 today), then they levitate there til the close, trading in a 1 pt range. Then for the 15 mins after the NY close , they trade higher. Simple trade, ........... and I'm still short.

buzzsaw99 Thu, 10/05/2017 - 14:51 Permalink

...put the breaks on. breaks on? breaks on? SRSLY??  effing breaks on?  you quote a guy who gets it wrong so that makes two retards for the price of one?  (three if you count zh printing it but their editor quit eight years ago so i don't.)

Hammer823 BSHJ Thu, 10/05/2017 - 15:52 Permalink

The default direction for stock indexes is UP. They are programmed to go UP everyday.If there is some bad news then maybe stocks are FLAT.A lot of the time, that bad news is turned into good news, and stocks again go UP.It takes a major event to make stocks go DOWN.And even then, the losses are reversed within 48 hours.Index gains are not allowed to be reversed.

In reply to by BSHJ

rusty55 Thu, 10/05/2017 - 15:28 Permalink

This chart gets our heads thinking it is topping.  The only analysts on Zerohedge getting the markets right is SHEPWAVE.  They freaking nailed the buysignal for the Russell on august 22.  If you did not read what they said today then i guess that is too bad