The SP 500 has been in a quiet choppy climb since the early June lows, and seemingly on path for another rally as recently outlined in our updates. The small cap growth stock index has lagged the large cap stocks since January of this year, but may soon re-take the reins to the upside. In addition to that, the NYSE short Interest ratio is attacking 5 year highs, which means alot of investors are betting against this market. The market continues to climb the wall of worry however, and a record number of dollars have been flowing out of stocks and into Bonds and Bond funds. This may smell trouble for the Bond investors and opportunity for the small cap investor at least over the coming weeks at a minimum.

To wit, if you review the chart below you will see that we have formed a potentially bullish pattern since April. A wide and deep base, often referred to as a “Reverse Head and Shoulder” pattern seems to be forming. The right side of the shoulder has been forming over the past 7-8 weeks and at the same time creating the classic “Cup with Handle” formation.

The current pullback or “Handle” pattern over the last 4 or so trading days is what often leads to another surge upwards in prices. Near term investors can look for the IWM ETF as outlined in our chart this weekend to potentially rally upwards and challenge the 84 area from the 80-81 ranges. Given the two bullish base building patterns and the relative under-performance this calendar year vs. the big cap stocks, it may be time to take a swing at the small caps with appropriate stops in place.

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David Banister

The Market Trend Forecast

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