Newsletter of Danny Merkel - Issue #115

Market Review:

In my opinion, it’s a tale of two markets right now. Large stocks are doing well, while smaller stocks generally are not.

Since I scan a universe of 5,000 stocks each day, I’m much more likely to come across small-caps. This is not because I’m targeting small stocks, but rather because there are simply many more of them.

And these numerous small stocks have been struggling for the past 2 years. This is evidenced by the chart of the Russell 2000 shown below:

The 2,000 stocks that comprise this index have been dead-money for two years. The only thing that seems to get this corpse moving is a jolt of short-covering.

Short-covering rallies tend to occur when the market becomes over-sold and, as the chart above shows, these periods can be identified using the RSI.

Each oversold reading was met with a brief bear-market-rally that was just strong enough to lure in novice traders, but never strong enough to actually make them much money.

Importantly, notice that this most re…