What to Expect After a Huge RUT and SPX Advance

Prior extremes in optimism made the market ripe for a pullback

Senior Vice President of Research
Mar 15, 2021 at 8:55 AM
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Another way to recognize the sentiment-based risk is to reduce large-cap exposure, while retaining exposure to small-cap equites. As I have been explaining since December, small caps have more short-covering potential, and should be emphasized in your portfolio…  the pessimism on display last week among small-cap option buyers on IWM component stocks is beginning to unwind quickly, with the ratio turning sharply lower. It still has room to run even lower, though, before moving into territory that represents higher risk in this group, from a very short-term perspective.”

          - Monday Morning Outlook, Feb. 22, 2021

In February, many of my commentaries referenced a strong technical backdrop, but extremes in optimism among traders inferred sentiment-based risk that made the market ripe for a pullback. In fact, just one week after I published the commentary excerpted above, the buy-to-open put/call volume ratio on iShares Russell 2000 ETF (IWM - 233.59) components hit an extreme low. Up to that point, the ratio was not in extreme territory like we saw with the all-equity and S&P 500 Index (SPX -  3,943.34) component-only buy-to-open put/call volume ratios.

“… since the mid-February closing highs on the SPX, Russell 2000 Index (RUT -- 2,192.21) and Nasdaq 100 Index (NDX -- 12,668.51)…these indices were down 4.2%, 6.6%, and 9.7%, respectively, as of Thursday’s close.”

          - Monday Morning Outlook, March 8, 2021

To no one's surprise, equities did endure a pullback, with the bulk of the decline occurring in the first week of March. In fact, large-cap technology stocks endured the largest of the declines relative to the other indices that we specifically mentioned last week. Last Monday, for example, the Nasdaq 100 Index (NDX - 12,937.29) closed 10.9% below its Feb. 12 closing high.   

The NDX did bounce from support at former peaks in October and November, but the sustainability of this bounce remains in question, because resistance quickly came into play at the late-January low, which is in the vicinity of the round 13,000 millennium level and its declining 20-day moving average.   

Moreover, last Thursday’s closing high was at 13,052, just shy of the 13,053 level that marks a 50% retracement of the February closing high and last Monday’s closing low. On Friday, the NDX was fighting to stay above 12,888, which is the site of its year-end 2020 close. 


I have heard multiple guests and hosts on CNBC say that this is not a heavily shorted market, and I agree with those statements when considering only SPX components. However, despite short covering in the Russell 2000 Index (RUT) over the past few reporting periods, I continue to see the small caps as heavily shorted, and thus the biggest area of opportunity if equities continue to advance.”

          - Monday Morning Outlook, February 16, 2021


On the heels of strength in financials, industrial and energy stocks, the SPX rallied strongly from its 80-day moving average, which coincidentally was in the vicinity of its 2020 close at 3,756. I find this interesting, as an observation that I made on Twitter left open the possibly that weaker hands were flushed out of the market when the SPX closed below its much-followed 50-day moving average earlier this month. 

Not only did the SPX move back into a channel in place since mid-November that I have been displaying in this commentary during the past few weeks, but it achieved an all-time closing high late in the week. The lower boundary of this channel comes into play at 3,890 to begin this standard March expiration week, and resides at 3,910 at Friday’s close. 

The top of this channel at week’s end resides at 4,046, interestingly just 10 points below the 4,056 level that is six times its 2009 closing low. Readers of previous commentaries are aware of the struggles that have occurred since the March 2009 closing low at levels that are two, three, four and five times the 2009 closing low. I will revisit this concept if the 4,050 area comes into play in the days or weeks ahead.

For now, the SPX must sustain a move above potential resistance around its February highs in the 3,930-3,950 area.


The SPX’s advance of more than 4% last week was impressive, but it was again the small-cap stocks, as measured by the Russell 2000 Index (RUT - 2,352.78), that shined. 

The RUT rallied more than 9% and easily closed above its February closing high at 2,298. Just as the level that coincides with 10% above the RUT’s 2020 close acted as resistance in late January, the 2,370 area, which is a round 20% above last year’s close, poses an immediate potential resistance level in the short term. Note, per last week’s commentary, that the level that coincides with 10% above the RUT’s 2020 close acted as support at the recent low.

I see the area between 2,260 and 3,000 as potential support on a pullback, with 2,260 the site of a breakout above a short-term trendline connecting lower highs in February though early March, and 3,000 a round number and the approximate site of February’s high.


Turning to the sentiment backdrop, the good news for bulls -- especially with the SPX and RUT making all-time highs last week -- is that sentiment measures showing optimistic extremes in mid-February are no longer at these extremes, suggesting that there is less vulnerability to a pullback relative to one month ago.

For example, in mid-February, the weekly National Association of Active Investment Manager (NAAIM) survey, which is a measure of equity exposure, came in at 110. This past week’s reading was 65, the lowest in six months.  

Moreover, the rate of put buying on equites has grown relative to call buying during the past month. The 10-day, equity-only, buy-to-open put/call volume ratio is back to a level that has preceded rallies in the recent past, albeit it is far from levels that have preceded massive, long-term rallies. As you can see in the chart below, when this ratio retreats to the 0.30 area, equities become more vulnerable to short-term selling bouts.

With this ratio still rising, I see large-cap technology stocks as the most vulnerable, as the NDX is still well off its highs, and is trading in a resistance zone coming into the week.

Continue to emphasize small-caps in your portfolio, as there is still more short-covering potential in this space, even as the RUT made a new all-time high last week, and is outperforming the larger-cap names, specifically large-cap technology stocks.

With expiration this week, I plan on making some comments on Twitter (@ToddSalamone) in regards to the SPDR S&P 500 ETF Trust (SPY - 394.06) and iShares Russell 2000 ETF open interest configurations, and how this may impact stocks.

MMO 315 New 

Todd Salamone is Schaeffer's Senior V.P. of Research

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