Market Rally: Too Far, Too Fast

Our proprietary index shows the market rally is overblown.

We converged all the indicators of a proper market recovery — both small-cap performance and economic indicators — in an easy-to-read index. We call it the Small-Cap Recovery Index. While it may not have the sexiest name, we are quite proud of how well it’s working.

The index itself measures where we are in the recovery. As of now, the SCRI shows a 7% increase since we started it a few months back. But here’s where it gets interesting…

We wanted to use this as a tool to predict where the actual stock market is headed. That’s where the SCRI Oscillator comes in. The oscillator compares the SCRI’s performance to the S&P 500. If the SCRI is outperforming the S&P, stocks are generally undervalued compared with the whole economy. Unfortunately, the opposite is currently true.

Small Cap Recovery Oscillator

As you can see, the recent market rally looks like it’s overblown. It was simply too much too fast. Of course, this tool is very new and has yet to be truly tested. But so far, it’s working. When it was outperforming the S&P, it pointed to a short-term bottom. We expect the opposite this time. It looks to be pointing to a near-term peak.

The Daily Reckoning