In a seasonally favorable period, US equity indices are rallying but with hesitancy, with small-caps and tech struggling to build on the most recent momentum. This can change if VIX breaches the eight-year trendline support.
 

As of the 16^th this month, non-commercials, for the first time since April, switched to net long Russell 2000 mini-index futures. (This is the latest week for which this series is available. Positions as of the 23^rd will be released on Wednesday.)

In the week to 12 August (this year), non-commercials were net short as many as 95,231 contracts – the highest since October 2022. Concurrently, on 1 August, the cash bottomed at 2143 and turned up. As this happened, bearish non-commercials were caught off guard and began to cover. By the 12^th of this month, the Russell 2000 had reached a fresh intraday high of 2596; in that week, as of the 9^th, non-commercials had reduced their net shorts to 19,317 contracts. The following week, as of the 16^th, they had switched to net longs of 10,082 contracts (Chart 1).

These traders are obviously responding to how the cash is behaving of late, but the question is if the recent momentum is going to last.
 

The small cap index reached a major low on 9 April when it tagged 1733 intraday. There was important horizontal support at 1700, or just underneath, and it held (Chart 2).

Earlier, in November last year, the Russell 2000 retreated after ticking 2466. Three years before that, in November 2021, it rose to 2459 and then went the other way. On 18 September (this year), those highs were surpassed, but not before a stretched bull-bear tug of war followed around those highs. Bulls have failed to meaningfully build on this breakout. As previously mentioned, the index did post a new high of 2596 on the 12^th, but the session – a Friday – reversed hard to finish lower at 2551.

Last week, the Russell 2000 edged up 0.2 percent to 2534. From bulls’ perspective, the good thing is that the index remains above 2460s, which is where it broke out of in September, and then 2300, which was aggressively defended six weeks ago. This could be one reason why non-commercials are as optimistic as they seem to be.
 

But a total adoption of risk-on is not yet evident. Small-caps by nature tend to attract aggressive traders, but this has failed to materialize in the seasonally favorable dying sessions of the year. The same holds true for tech as well.

In a holiday-shortened last week, the Nasdaq 100 added 1.2 percent to 25644, which remains way below the all-time high of 26182 posted on 29 October. A lower high of 25835 was registered on the 10^th this month. Last Friday’s intraday high of 25717 makes up another lower high (Chart 3). In fact, Friday’s session high was rejected at that trendline resistance, and the session reversed lower to slightly end in the red.
 

By the looks of things, traders seem to be seeking the comfort of large-caps. Of the 10 sectors within the S&P 500, financials (XLF), healthcare (XLV), industrials (XLI), and consumer discretionary (XLY) are trading at/near new highs and are helping the overall index.

The S&P 500 last Wednesday edged past its intraday high of 6920 posted on 29 October, building on it further on Friday although bulls were unable to hang on to the session high 6946, ending the week up 1.4 percent. Last week’s performance followed the prior week’s potentially bearish hanging man on the weekly (Chart 4).

How things transpire in the three remaining sessions this year and early next year will probably have a lot to do with how volatility behaves.
 

VIX is very near a must-hold trendline support. In November 2017, the volatility index tagged an intraday all-time low of 8.56. It has been more or less trending higher since, with several lower highs – 85.47 in March of 2020 (versus record 89.53 in October of 2008), 65.73 in August of 2024, 60.13 in April this year and 28.99 in October – in the process.

Last week, VIX dropped 1.31 points to 13.60. The trendline in question lies around 13 (Chart 5). If equity bulls authoritatively take control of things, and VIX convincingly breaches the trendline, it does not take long before a test of 11-12 occurs.

For that not to occur, volatility bulls need to be able to recapture 14.20s as soon as possible.

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