While index prices have marched significantly higher, this is not the type of market where a rising tide lifts all boats. Many boats are being left behind, evidenced by new highs vs. new lows (a chart I showed 10 days ago) in the market, cumulative advancers vs. decliners, and today’s chart of IWM vs. SPY.
When investors are feeling more risk-loving, they’re more likely to buy the higher beta, riskier, smaller cap stocks that make up the Russell 2000 ETF, IWM. When they are more in the mood of defense, then SPY generally outperforms IWM. Here is the 3 year chart of the ratio of IWM / SPY:
IWM is at the lowest levels relative to SPY since October 2011, and below the average of the last 3 years. This ratio peaked in the spring of 2011, around the same time that most global equity markets peaked. The U.S. has been a strong exception, making new highs in 2012. But underneath the surface, all does not look well.
I hate to be stubborn in the face of market strength, but I just don’t see the signs of a new sustained up-move in stocks. The indices have the look of a serene landscape painting, but it feels like that’s only because the approaching dark clouds and lightning have been hastily painted over.