On November 6, we noted in our Mid-Day Markets update that a comparison of the SPY and IWM showed a deterioration in the Russell 2000 small-cap ETF relative to the big-cap SPY. We said that as long as IWM was trading below its 20 DMA at 149.11, we would view it as vulnerable to downside continuation off of its Oct 9 all-time high at 150.58.
We were watching and continue to watch this SPY-IWM relationship closely, as, historically, in the later stages of a bull market, a divergence is very likely. In other words, as a bull market loses steam, small companies lose upside momentum relative to the “go to” mega-capitalized companies.
Right now, all eyes are on IWM juxtaposition with its sharply declining 5 DMA, now at 146.41, which has served as a tight-fitting down-sloping resistance line. As long as IWM is trading beneath its 20 DMA, we should consider the dominant near-term downtrend as intact and the dominant near-term influence on price action, which is a negative sign for the SPY and S&P 500 bulls.