Small Cap Stocks and the Put/Call Ratio

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On Tuesday, the S&P 500 fell 0.1% and broke a six day winning streak. Breadth was negative (by a 7:6 ratio) for the second day in a row and downside volume outstripped upside volume by almost 2:1. Total volume was slightly lower than Monday’s figure, but remains at very low levels. The daily Coppock Curve has a bullish bias for 17 of the 24 S&P industry groups.

Although total breadth was negative on Tuesday, the S&P 600 Smallcap index was an exception. Breadth was positive for the “600” even though it was negative for both its “500” (large cap) and “400” (mid cap) siblings. In recent comments we highlighted the idea that the small cap index had begun to outperform after a fairly long period of underperformance. We suggested that this new development was both a sign of relative strength and a signal that participation in the current uptrend was beginning to broaden out. That still seems to be the case.

S&P 500 with 10-Day CBOE Put/Call Ratio

Meanwhile the 10-day CBOE put/call ratio has moved into overbought territory. As the nearby chart shows, the S&P 500 has tended to pull back when the put/call ratio becomes overbought. Clearly, the extremes of those pullbacks differed in intensity, but they are evident. What may be a key this time is whether or not a nearby correction is able to hold above 1086-1085. A breach of that range would be the first lower low since July on the weekly chart. In turn, that would imply additional weakness. How significant that weakness might be could depend on the ability of the small cap stocks to act as a cushion.

That said, the post-November uptrend continues to receive the benefit of the doubt. Moreover – and as mentioned in prior posts – the November-December trading range is best counted as an Elliott Wave triangle or some other continuation pattern within a larger uptrend. Thus, even though the index has finally established a solid foothold in the important 1121-1156 range, higher highs cannot be ruled out. Within the range, resistance is indicated near 1137. A breakout through 1156 would allow for further strength toward 1170.

Nearby support is at 1094-1093, followed by 1086-1085. However, the early November low has become as important to our count as is the July low. Thus, 1029 is now viewed as tactical support.