Some stock market soothsayers have warned of a drastic retreat in the major indexes. Thus far, the stock market has not satisfied these bearish forecasts. Even July 17's session fell short of delivering anything more than a paltry pullback (about 1%) – that was the day a Malaysian Airlines passenger jet was ripped from the sky over Ukraine by a guided missile and Israel began a ground offensive against Gaza militants.
It seems that if the market were ripe for a major correction, either or both of these dateline items could have served as triggering mechanisms. Investor complacency was shaken as reflected in the CBOE Volatility Index, which soared 30% in that session, but the market's uptrend was barely dented. The S&P 500 subsequently rallied and set an all-time record closing high less than one week later.
(Don't miss: Value vs. growth; Beatles vs. Rolling Stones)
This latest example of market resiliency amid headline geopolitical events underscores the impressive technical structure of this bull market. It also emphasizes the critical underpinnings of monetary policy and corporate earnings comparisons.
In her most recent testimony, Fed Chair Janet Yellen indicated the Federal Reserve was likely to maintain an accommodating monetary stance for months to come. And second quarter earnings results appear to be on track to beat Wall Street analysts' estimates by an impressive majority, implying healthy skepticism about the economic outlook.
The technical atmospherics argue against becoming transfixed on a major correction. The price architecture of many leadership stocks and the major stock indexes continues to reflect regular backing and filling actions that have routinely addressed short-term price and sentiment excesses while establishing support at incrementally higher levels. These constructive and orderly price movements are bolstered by accumulation trends evident based on net money flow analysis. These bullish technical indications are prevalent across a broad and diverse spectrum of industry sectors, which points to a market that may be better equipped to technically withstand both headline risk and occasional abrupt and short-lived rotational corrections among the market's leading categories.
Recently, the Russell 2000 Index (RTY) has fallen considerably behind the broader, multi-cap Russell 3000 Index (RAY). RTY represents small and medium capitalization stocks and this index has produced a significant negative divergence versus the RAY since July 7. The divergence may present an opportunity to initiate or increase positions in medium and small cap stocks. Since the March 2009 market bottom, RTY has outpaced both the RAY and the S&P 500 Index (SPX) by a substantial margin. On an annualized total return basis RTY is up 27.09%, versus RAY up 25.41% and SPX up 24.80% (as of 7/23/14).
I would argue from a technical perspective that RTY is poised to reclaim its performance dominance short term while also maintaining its leading ranking through the remainder of this cycle.
Eugene E. Peroni Jr. is senior vice president of equity research at Advisors Asset Management. This commentary originally appeared on the firm's website.
