The RUT and BKX Indicators

What Each Index is Telling Us Right Now

By Bryan Bottarelli
Thursday, June 05, 2008 9:47 AM EDT
Thu, 5 Jun 2008 13:47:00 GMT

Dear Bottarelli Research Member,

In past alerts, I’ve discussed how the strength of the Dow Transports (TRAN) disproves any bear-market fears. As you can see below, the Transportation Index has held up remarkably well in the midst of the recent selling pressure. And as a follow-up to this opinion, the strength of the Baltic Dry Index (which many argue is a better gauge of the global transportation sector) further strengths this argument. Therefore, I’ve maintained an upside bias in our latest trading positions.

TRAN

Now, I’ve discovered another piece of bullish ammunition to add to our belt — and it comes in the form of the Russell 2000 Small Cap Index (RUT). As you can see below, the RUT has also been bucking the weak market internals and moving to the upside. In fact, the RUT is on the verge of breaking out above its 200-day moving average, and this is something I really like to see. After all, on a historical basis, small cap stocks tend to be leading market indicators. Their recent strength paints a strong picture going forward.

RUT

And if that weren’t enough, I also came across an interesting historical statistic about the Banking Index (BKX). It said that whenever the BKX drops at least 1% in four consecutive days, this is a strong bottom-indication signal. You see, on a historical basis, whenever the BKX has dropped over 1% in four straight days, the major market averages have bounced higher between 3% and 6% over the following 3, 5, and 10 days. As you can see below, the BKX has indeed dropped over 1% over the last four days, so this further strengths the case for a market bounce even more. In fact, based on this statistic, it might be a good time to play an upside call on a company like Goldman Sachs (GS – NYSE). I’ll keep an eye on this situation for any trading opportunities.

BKX

So on that note, let’s maintain our current positions and see how the morning trading plays itself out. Over the last two sessions, we’ve seen our positions moving in our direction, only to get derailed by two end-of-day sell-offs (one sparked by Lehman fears and the other sparked by Bernanke). I openly admit that this “jittery” trading has been a challenge, but it we can hold our ground and stand firm, I feel we’ll come out just fine.

I’ll be out later in the day with further updates. But in the meantime, if you have yet to take advantage of our new Bottarelli Research LEAPS service, you’ll want to act quickly. Spaces are being filled up as we speak, so be sure to take advantage of this Charter Membership offer. Details below:

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And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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