The correlation between stocks has never been weaker. Last week in one day we saw the Russell 2000 a broad measure of 2000 mid cap stocks up over 3% in one day. That same day the heavily tech weighted Nasdaq where a few stocks account for 25% of the index by weight, was down 3%. Unprecedented! It’s very difficult as a trader to move away from decades of highly correlated markets, but until proven otherwise I think it is best to approach the market that way. In practical terms this means having both longs and shorts is okay at the same time. In the majority of market sectors over the last few months shorts (believe it or not) were the way to be. Only tech with a bit of help from health care have brought the SP 500 and Nasdaq to new highs. Most other sectors are lower!

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The Russell 2000 represented by the ETF IWM is attached. The pattern after a long sideways consolidation in any market, is to break one way long enough to collect all the breakout followers and collect everyone else’s stop losses. Once that is done the market very often breaks even harder in the other direction. I think the first move of this sequence started this week in the IWM. The charts very clearly show the pattern. Very likely this break out the top will run its course, and will be followed by a much more dramatic decline. I am just waiting and watching. The attached chart is a weekly chart so it will be weeks, maybe a few months before the pattern plays out with the end of the first leg. For traders the IWM is a buy for short term trades over that period. But when it’s over it will really be over.  

Thanks,

Joe