Enis’s Macro Wrap – How You Measure the Market

by Enis August 23, 2012 7:51 am • Commentary

Dan and I had a discussion yesterday about the proper way to gauge this market.  The cause for our discussion was the increasing divergence between the Russell 2000 index and the S&P 500 index.  In order to make effective market decisions, you need to be making proper measurements and using proper data.  In my view, traders’ focus on the S&P 500 is distorting their view of the strength of this market.

Here is a chart of IWM over the past 3 years:



I’ve drawn a red line at the $75, close to the midpoint level, where IWM has spent about half of the time below that level, and half of the time above.  IWM is currently less than 10% above that level, and it is still well below the highs for the ETF set in 2011.

Looking at the same chart for the SPY, we get the following:



The SPY is showing much more strength, trading more than 15% above its midpoint level of around 122.50, and making new highs this month.

SPY has been stronger as traders and investors have piled into large cap, high dividend stocks that are viewed as more secure.  The weighting of the top 2% of names in the S&P 500 also account for 20% of the index (so names like AAPL, XOM, and T have a disproportionate impact), whereas the weighting of the top 2% of names in the Russell 2000 account for about 5% of the index, a much more balanced measuring tool.  In sum, be careful how you measure this market.  If traders are watching SPY, they’re thinking this is the potential next leg of the 3.5 year bull market.  But IWM is indicating that the bull market might have ended in 2011.

  • Overnight price action started with strength in Asia based on more potential easing.
  • Europe has sold off back to flat after a strong open, as PMI data came in close to expected, another weak reading.
  • SPX futures and Treasuries are within 0.1% of unchanged.  Commodities are the main overnight mover, with oil and copper up 0.5% and 1% respectively.
  • Jobless claims will be closely watched as each jobs data point has increased significance ahead of the FOMC meeting on September 12th.  The non-farm payrolls data on September 7th holds special significance as a result.