T2108 Update – February 21, 2012 (95th Percentile)

(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 83% (overbought day #34)
VIX Status: 18
General (Short-term) Trading Call: Close more bullish positions. Begin but do NOT expand an existing bearish position.

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)

Commentary
At this point, I feel like I should buy a rubber stamp for creating this post. Then, you can wake me when it stops working.

T2108 closed at 83% for a 34th straight day in an overbought position. The current period now ranks as the 8th longest overbought period since 1986, perched atop the 95th percentile. Given the length of this overbought period, I have been very surprised that T2108 has yet to cross the 90% threshold. I am guessing the market’s extremely slow and steady churn is not generating quite enough momentum for T2108 to step it up another notch. Something to think about when speculating about how much more upside this overbought period could possibly still hold.

In all my close observation of the S&P 500, I almost missed the Russell 2000’s impressive climb toward all-time highs, set just last year. In fact, over the many years, the Russell 2000’s collection of small cap stocks have managed to print higher highs and higher lows, albeit marginally. Who says buy and hold is dead, eh? (Especially if you buy into the sell-offs).

The Russell 2000 came to mind after I read a Wall Street Journal article titled “Investors Shrug at U.S. Small-Cap Surge” (free in Yahoo!Finance). It seems that the Russell’s march is drawing a yawn from investors as they continue to cash out of small cap equity mutual funds. Not even hedge funds have been enjoying the ride:

“U.S. small-cap mutual funds have suffered an exodus of $15.9 billion since the end of April, according to Morningstar. Assets at U.S. small-cap exchange-traded funds are down by $4.4 billion…mom-and-pop investors are largely ‘unenthused’ by the recent small-cap surge, while many hedge funds are steering clear of them…”

The lack of interest has sapped the market of trading volume:

“Trading volumes on Wall Street have been light for months, hedge funds and investment banks have pared down their trading operations, and the small investors that exited the market after the 2008 financial crisis are hesitant to jump back in—least of all to the riskier small stocks that make up the Russell.

As a result, the few remaining investors and traders are having an outsize impact on small-cap share prices…”

The important implication for any light-volume rally is that heavy volume becomes a potential warning sign – either a blow-off top as the final buyers final panic their way into the market or the beginning of the end of the rally as sellers rush in to lock in profits before the music stops. Stay tuned…!

(See my T2108 Update from January 25, 2012 for my analysis of the incredibly light trading volume in the earlier part of this rally.)

Weekly T2108

*All charts created using freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long SDS and VXX; long VXX puts