WEEKLY NEWSLETTER CONTRIBUTION

Hedging Your Bets With Matt Davio: As the Russell 2000 Goes, So Goes (Down) the Market

We’ve had three years of bull market activity on the Russell 2000 (RUT) index since the war in Iraq started in the Spring of 03.  The mighty mouse RUSSELL went from 343 to 736 most recently last week.  So the smallest stocks have led this rally from the onset with an over 112% run up.  The way I see this move is that the smallest and most volatile names have been the easiest place for the reflationary efforts of the Fed to be put to work. Note that we have not had the same type of action in the “real” solid stalwarts of the American economy, the Dow 30 and the S&P 500 stocks.

Now let’s look at this from a technical analysis perspective:  If you look at the first power move of this index from 343 to the intratrend high of 606.42, then take a look at the next low from that power move of 515, and subtract the latest high of 736, you get almost a mirrored move in the index.  This still projects a move possibly up to 778 or so.   Technically, I have found that over time many moves – whether it be that of individual stocks or indices -- move in two steps that mirror the first original move.  Over the last 3 years, those moves have now been completed for the RUSSELL.   Here’s what I think that might mean:

I first make the guess that the broader market, which has been led up by the Russell, will follow it as we continue into the future. The question is whether money will continue to pour into the smallest of small cap companies or will we begin to roll over on the downside?   I think not – at least not for much longer.  The index is at around 735 but my projected top is around 775, which is merely another 5%.

The reason I think this is that the final parabolic piece of this move may have just occurred in January.  January saw the RUSSELL increase by 9.2% alone in January of 06. This is the biggest one month move the Russell index has seen since this rally began over three years ago.

Now it may take some time for this momentum to wane, but the earnings period we recently finished was mediocre at best in my eyes overall. I would anticipate a trend change in small cap stocks leading the rest of the markets down as we proceed through 2006.

I still anticipate a major move down in the broader US indices led by the RUSSELL due to what may turn out to be the final parabolic move we just witnessed.  Let’s see how this develops, but I can say that my money will be betting against small cap stocks from this point on and although I may be early, I feel they will lead the markets through an extremely volatile and exciting 2006.

 

 

M3 continues to explode even as we transition to the Helicopter days.

 For the quarter ending Jan-23-06, the growth of M3 was +7.7 pct Y/Y, which is another gain. And compared to the quarter ending Jul-25-05 money supply growth was +9.2 pct, and to Oct-24-05, it was +8.8 pct. So for all you who said that the Patriot Act was repatriating USD during May through October, the current rate is much more explosive.

As the total U.S. money supply grows bigger, money gets cheaper, i.e., less value compared to gold. With money supply growing at about three times GDP growth, month after month, the U.S. Administration is reflating the economy at the same time the Fed is tightening credit by continuing to raise short-term interest rates.

The Retail numbers coming in fast and furious. Mixed bag, seems like Big boxes "matched" the expectations such as WMT, but the small specialty have either blown em out or missed and guided. Tough to make predictions what impact the market will have. The market does feel heavy to me and the rally yesterday afternoon was much like the retail numbers, very scattered. The SP and NDX laggged greatly the Dow moves yesterday. Oil got smashed in the afternoon and 10 year rates rocketed up yesterday.  The Trannies were down 1% and all in all a very confusing non confirming trading session. I am leaning more short into the 2nd month of the year as a change in the winde appears near to this investor.