One of the nagging concerns about the current market rally is the lack of participation by small cap stocks. This week's action was another example of that troubling trend. The Russell 2000 Small Cap Index lost -0.72% this week (versus a +0.54 gain by the S&P 500 Large Cap Index). In a strong uptrend, small caps should be rising with large caps. Chart 4 shows the early July top in the Russell 2000 failing to overcome its early March peak and losing 4.5% since then. The RUT/SPX relative strength ratio (below the chart) shows how badly small caps have lagged behind. Since March 4, small caps have lost -4.7% while the S&P 500 has gained +5.5%. That 10% underperformance by the RUT is the worst since 2012 when the market was in the midst of the last downside correction. The good news is that the RUT hasn't yet suffered any serious chart damage. Friday's 1.5% gain kept it above its 200-day moving average. The RUT may also be finding support at its 62% Fibonnaci retracement level measured from its May low to its July peak (green lines). Although I remain concerned about the relative weakness of small caps, the RUT would probably have to fall below its May low to signal a serious problem with the rest of the stock market. For the record, small caps usually peak first at market tops. Janet Yellen's comment at midweek that small caps were "stretched" contributed to some of this week's selling.
