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The Standard and Poor’s 500 Index (SPX) closed today at $2180, up $9. SPX has been trading in a tight channel from $2157 up to $2194 over the past seven weeks. This channel has been reinforced over the past couple of weeks by the shadows of the candlesticks. Pull up a chart of SPX and observe how the upper and lower candlestick shadows define support and resistance.

The bulls and the bears are in a closely matched tug of war. The bulls are being held in check by poor economic data, such as one percent GDP growth, and a string of five consecutive quarters of declining corporate earnings. On the other hand, the bears can’t manage to take control and drive the market lower primarily because the FOMC has left interest rates at record lows.

Trading volume in the S&P 500 continues to run below average with neither the bulls nor the bears able to sustain a strong push. SPX trading volume has only increased enough to touch the 50-day moving average (dma) a couple of times during August.

The Russell 2000 Index (RUT) price chart presents a different picture from SPX in two key respects. First, RUT has been trading higher rather consistently since the BREXIT panic. Today’s close at $1252, up $12, is the high for RUT for 2016. But the second difference between RUT and SPX is that SPX has set several
all-time highs over the past few weeks. RUT remains 4% below its high from last year at $1296.

This lagging behavior of RUT suggests some restraint on the part of the bulls. They are not sufficiently confident to “go all in” and strongly buy the small cap stocks. But the persistent trending of RUT higher as SPX is trapped in a sideways channel may suggest that the bulls are gaining confidence.

GDP growth rates of one percent or less are on the brink of recession. At best, we have a very lackluster economic environment. When I add five consecutive quarters of declining corporate earnings, I am seriously concerned about our economy. But then I look at the market prices. How long can this continue?

Be cautious.