Small Cap Stocks and Interest Rates Lead Stocks Lower

Key Points

• The Russell 2000 is leading the stock market down. 
• Treasuries may also be signaling a bear market in stocks.

You can read the blog and checkout the charts here: https://www.brtechnicals.com/small-cap-stocks-and-interest-rates-lead-stocks-lower/

The Russell 2000 Leads Stocks Lower

To gauge the future of the markets, we need to watch small caps. Small cap stocks have led this market decline, which began in September. Eventually the large cap stocks caught on, and in October they began their decline. The current supports for stocks, which have been referred to as the October lows, exist because the Russell 2000 found a support at it’s January lows. 

That’s right, the Russell 2000’s October lows are also its January lows. The large cap indices have formed a support where there wasn’t one before. Only the Russell 2000 has found a legitimate support that has been tested. This tells me the Russell 2000 is the index in charge and large caps stocks are likely to follow its lead. 

Are Treasuries Forecasting a Bear Market?

Interest rates are the other big issue. Back in January, I built a chart that showed an interesting phenomenon. When Treasury yields moved up to its trend line, but failed to break it, stocks fell shortly afterward. 

This year the 10-Year Treasury broke its trend line, but the breakout has since failed. I believe this is likely to put pressure on stocks like it did back in 2000 and 2007. 

In addition, we have seen the first yield curve inversion. Granted, the inversion is taking place between the 2-Year Treasury and the 5-Year, and not the more popular spread between the 2-Year and 10-Year Notes. 

However, it is still an inversion, and many investors see it as a sign that the 2/10 spread is next.  To many, this is a sign of an incoming recession. However, the signal could take many months to a few years to play out.

Submitted December 10, 2018 at 05:19PM by BR-Technicals https://ift.tt/2EgUsNc