Wednesday, July 23, 2014

Small Caps' Positioning

Yesterday market rallied with small caps leading the charge. If this situation persists, we could see a sharp rise in equity prices. Over the past few weeks, investors have reduced their long bets on small caps very significantly. In the following chart, red line shows the nature of bets of large funds. Right now, they are aggressively short.

Last time these large funds were this short, small caps rallied sharply and for quite some time. This means that there is a lot of hidden rally fuel in the small cap stocks, which could result in a sharp rally. Typically, rallies start with short covering and then give way to genuine buying as people see prices rising.

From an Elliott wave perspective, recent decline from June top remains corrective (3-waves) in nature. Now we need to break above critical level to confirm this assumption. Once uptrend reinstates itself, it will be interesting times for the small caps.

On the other hand, large caps are nicely poised for a breakout.

Moreover, IPM bottom window should mark the start of the rally, which could take SP500 to above 2000 and even to 2100. A market rally under current socio-political circumstances with Russian tensions, Israel-Palestine conflict and Iraqi uncertainty, would mean that news don't drive the market. Rather, they are driven by other elements e.g. Elliott Wave & sentiment (contrarion) .

IPM turn dates have already been emailed to subscribers. Next update will be sent on July 26/27.

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