10/19/2017 Small-Caps Seeing Historic Squeeze

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Small-Caps Seeing Historic Squeeze

By Tyler Durden
Created 10/18/2017 - 08:18

[1]

by Tyler Durden [1]

Oct 18, 2017 8:18 AM
[2] [3]

For the last month we have been noting a dramatic divergence between Small Cap stock prices and their implied risk...

[4]

We can only remember one such lengthy decoupling in recent history, and that did not end well...

[5]

And of course this is all occurring as Small Cap earnings expectations plunge...

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10/19/2017 Small-Caps Seeing Historic Squeeze

[6]

But now, as Dana Lyons' Tumblr details [7], there has only been one trading range in the history of the Russell 2000 tighter than the current one
and it immediately preceded a crash.

[8]

As U.S. large-cap stocks continue to make new highs seemingly every day, the small-caps are doing something remarkable. Or, more accurately, it is
what they arent doing that is remarkable. They arent moving at all almost literally. In the past 2 weeks, the Russell 2000 Small-Cap Index (RUT)
has amazingly traded within a range of just 1% (actually 1.01%but close enough). This is just the 2nd time in its history (along with July 15, 1998)
that it has traded for 10 straight days within an overall range of just 1%.

What, if anything, can we reasonably expect from the RUT following the culmination of this historic lack of movement? Well, tight ranges like this are
often a precursor to a spike in volatility, at least in the near-term, as the range break releases the considerable coiled-up potential energy. But
which way will it break up or down?

Unfortunately, we dont have a crystal ball. Both outcomes are plausible and explainable (often after the fact in the case of the latter). These tight ranges
can constitute a continuation pattern in which prices digest the prior move before continuing in that same direction, e.g., up, in this case. However, the
lack of movement within these tight ranges can also signify indecision and can precede direction changes.

The July 1998 event, which, at 0.99%, is the only 2-week range in the RUTs history tighter than the current one, occurred on the heels of a bounce as
well. That event would mark a direction change and immediately precede a 3-month crash of nearly 35%.

That is but one precedent, however, which is certainly inadequate in forming statistically sound expectations for our present case. If we loosen the
parameters a bit, perhaps we can find a little more instruction. In this case, if we broaden the 10-day range parameters to 1.25%, we come up with 7

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more unique occurrences over the past 27 years. Perhaps thats a little more helpful.

Here are the dates we came up with:

5/19/1993
6/22/1993
7/30/1993
9/13/1994
3/24/1995
5/10/1995
2/20/1996
7/15/1998
10/16/2017

As you can see, most of the occurrences happened during the low-volatility era of the mid-1990s. In fact, that 1998 event was the last one prior to the
current one. That makes the RUTs current trading range seem even more remarkable. But what will it lead to?

Lets take a look at what transpired following the 8 prior events.

Without zeroing in on whether these incidents signified continuation patterns or reversals, the first thing that stands out is that the aggregate
performance following these precedents is significantly positive. Of course, a sample size of 8 is hardly robust; however, we can at least
dismiss fears that the pattern is necessarily bearish.

There is still the matter of the 1998 occurrence which led to an immediate loss of a third of the Russell 2000s value, not to mention whatever
other incident led to losses in the 2 and 3-month time frame. Looking at the 1998 incident a bit closer, we see that, while the RUT had bounced for
about a month prior to the 10-day range, the bounce came on the heels of a multi-month decline from 52-week highs. Thus, unlike todays range, the
1998 version occurred with the RUT well off of its highs, by 6% to be exact. In reality, the appearance of the 1998 range resembled more of a bear-flag,
i.e., a continuation pattern downward, than todays bull-flag looking formation.

That got us thinking about what the other 7 occurrences looked like. Thus, as we like to do, we measured the RUTs distance from its 52-week high at
the time of each incident. As it turns out, one of the other 7 events saw the RUT over 5% below its 52-week high at the time of the 2-week range the
September 1994 occurrence. As it turns out, the RUT was lower following that event from 1 week to 3 months, with a 3-month drawdown of -8.5%.

The other 6 events occurred with the RUT closer to its 52-week high, i.e., within roughly 3%. Of course, those 6 saw the RUT perform almost
flawlessly going forward. Here is the aggregate performance following all of the events, delineated by the RUTs distance from its 52-week
high.

We want to be careful not to make too much of this study containing just 8 samples, especially as none of them even took place in the past 19 years.
However, to the extent that we can draw any conclusions from reasonably similar extremely tight ranges in the past, the bulls certainly should feel good
about the evidence.

* * *

This is a free look at the all-access versions of our charts and research that we post daily (among much more) on our new site, The Lyons Share. [9]
TLS is currently running a 30th anniversary 1987 Crash Commemoration SALE [10], offering a discount of 22.6%, or the equivalent of the Dows 1-day
drop 30 years ago. The SALE ends October 22 so considering the discounted cost and a potentially frothy market climate, there has never been a better
time to reap the benefits of our risk-managed approach. Thanks for reading!

Behavior Dow 30 Ethology Holozoa Mathematical finance None Reality Russell 2000 Russell 2000 Russell 2000 Index Rut
Technical analysis Theriogenology Volatility Volatility

Source URL: http://www.zerohedge.com/news/2017-10-18/small-caps-seeing-historic-squeeze

Links:
[1] http://www.zerohedge.com/users/tyler-durden
[2] http://www.zerohedge.com/printmail/605539
[3] http://www.zerohedge.com/print/605539
[4] http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/17/20171017_EOD13.jpg
[5] http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/17/20171017_EOD20.jpg
[6] http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/17/20171002_eod6.jpg
[7] http://jlfmi.tumblr.com/post/166532099330/small-caps-seeing-historic-squeeze
[8] http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/17/20171018_squeze.jpg
[9] http://t.umblr.com/redirect?
z=https%3A%2F%2Flyonssharepro.com%2F&t=NWUzMDY2ZDA4ZTUwMjY3NzgwYzkzNTY4ZmNkNWVmOGI5YWMxOGEzYixBWFRGR1RrOQ%3D%3D&b=t%3AiVABxSjy5YaH
caps-seeing-historic-squeeze&m=0

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[10] http://t.umblr.com/redirect?
z=https%3A%2F%2Flyonssharepro.com%2Fregister%2F&t=N2FjZjc2Y2I5OTJlNWVlODk0Njk1ZTA2OTNiMWRjZjE5ZGFkMmQ3OCxBWFRGR1RrOQ%3D%3D&b=t%3AiVABxSjy5
caps-seeing-historic-squeeze&m=0

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