Stocks Extend Early August 2012 Rally But Small Caps Underperform:
Stocks extended yesterday’s gains with the S&P 500 rising comfortably above 1,400. The price increases were led by financials and tech again today but the rally faded by 3:00 PM. The S&P 500 rose to 1,407 and got bulls ready for more action this month but these gains have slowed toward the close and the small cap index IWM has relatively underperformed. This could mean the rally may take a breather and consolidate before the next leg higher. Investors are shifting out of bonds and will prefer high paying dividend stocks that are “safer” compared small caps until these investments become crowded.
No news from abroad and a lack of economic data out this week allowed stocks to move based on future outlook and past prices. U.S. equities are still a bargain as the average P/E is in the low double digits around 12-13. In the intermediate-run, stocks are poised to move higher but may be rangebound for the next few trading days after the significant run up last week and early this week. The TLT has given us more evidence that bonds are becoming less attractive and it gapped down today after rebounding from downward pressure late yesterday. We would not be buying the TLT on dips and expect it to go to $124 or lower in the near term.
From July 9 to August 7, 2012 the IWM is up -0.45 percent versus the XLF +3.41 percent and the S&P 500 +3.56 percent. Continued rotation into large cap stocks may occur this month.