The Russell 2000s Phase Points to Contraction

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As some of our Modern Family members get closer to their 200 week moving averages (or the 4-year line in the sand that many economists watch), I took a look at the 4 accepted business cycles along with the Family’s phases to see if that offers us a crystal ball for 2016.

The 4 Stages of the Business Cycle

1. Contraction - When the economy starts slowing down. It's usually accompanied by a bear market.
2. Trough - When the economy hits bottom, usually in a recession.
3. Expansion - When the economy starts growing again. It's usually signaled by a bull market.
4. Peak - When the economy is overheated, and is in a state of "irrational exuberance." This is when inflation rears its ugly head.

Comparing these 4 cycles to the Russell 2000s or our Granddaddy, we can see why savvy investors know that the market is a lead indicator, sometimes leading by 6 months in advance.

For consistency’s sake, I looked at the weekly charts for IWM rather than the daily ones using a 65 and 200 week moving average.

In 2010, IWM crossed back over the 200 week moving average and although tested it later on that year, by September 2010, IWM cleared and rallied.

Playing armchair economist, the business cycle in 2010 would be considered Expansion having had is Trough in 2008-2009. IWM by 2010, went into an Accumulation Phase, entering a bullish one late December 2010.

The economy continued to expand, thanks to a lot of Quantitative easing. By October 2014, IWM flashed warning signs, but with help of the European community injecting money into the Global economies, Irrational Exuberance prevailed until the peak in June 2015.

Last August, IWM returned to a warning phase on the weekly charts. Although NASDAQ made an impressive and heady rally thereafter, peaking finally in early December, IWM never returned over the 65-weekly moving average.

Currently, IWM is approaching a test of the 200 weekly MA or the 4-year business cycle completion. Stands to reason with IWM leading the charge, we could see a period of greater Contraction.

Grandma Retail (XRT) is also close to the 200 weekly MA and Transportation (IYT) sits closer still.

I will be watching these moving averages carefully. A breach of course, suggests a hard road ahead. If any of the aforementioned can hold and turn back up, I imagine rallies will be equally arduous to sustain.

However, if that does happen, we can entertain the idea of stagnant prices rather than a big trend down, at least for the next several months.

The trick will be to stay focused on the areas that can grow regardless because productivity will outpace demand.

S&P 500 (SPY) Even with the confirmed reversal from Monday this was subject to the news and broke the new 60-day low put in on Monday negating the reversal pattern

Russell 2000 (IWM) Held well at 108, but still looking very heavy.

Dow (DIA) Similarly to SPY, failed to hold the reversal pattern, now making 168.00 support to hold.

Nasdaq (QQQ) Broke the 200 DMA putting this back into an unconfirmed distribution phase with 109.15 the 200 DMA to clear.

XLF (Financials) Gapped lower on the one negating the reversal put in Monday. With some support around the 23.00 level.

KRE (Regional Banks) Gapped lower after the inside day but held 40.00 making this pivotal support.

SMH (Semiconductors) Held support at the gap put in on Oct. 3rd. If fails that then the next support is all the way down at 48.00.

IYT (Transportation) Nearing the August lows at 128.26, needs to hold this level, or else trouble.

IBB (Biotechnology) Managed to hold the 320.00 level on a closing basis. Needs to continue to hold here.

XRT (Retail) Held well over the support at 42.00, needs to bounce from here.

IYR (Real Estate) Gave us an inside day over the 50 DMA confirming the phase change to bullish. Still needs to clear 76.13 to really get going.

ITB (US Home Construction) Found support around 25.50, the September lows.

GLD (Gold Trust) Nice move over the Dec. resistance and the 50 DMA for an unconfirmed recovery phase.

GDX (Gold Miners) Back over the 50 DMA for an unconfirmed recovery phase but still needs to clear 15.00 to get moving.

USO (US Oil Fund) Yet another new low for this instrument.

OIH (Oil Services) Failed to hold the 25.40 level thus negating the potential bottom.

XOP (Oil and Gas Exploration) New multi-year lows here as well.

UNG (US NatGas Fund) Still all about the 50 DMA at 8.76

TAN (Guggenheim Solar Energy) Held well at the 100 DMA at 29.49. Looking for a bounce from here.

TLT (iShares 20+ Year Treasuries) Now back over the 200 DMA for an unconfirmed accumulation phase.