Inside Markets — Cyclical Recovery?

On Friday, the cyclically-sensitive RTY managed to close above our technical resistance number of 2070.  Friday’s closing level was an important milestone, but the index needs to sustain these levels and extend a little higher to confirm a breakout.  The four-month long rally-to-date has been characterized by relatively narrow leadership and broader participation would suggest improved durability.  A confirmed breakout in the RTY also opens the door for a period of mean reversion following record relative underperformance.

A confirmed break in the RTY would also suggest the US economy is nearing some type of cyclical recovery, which is hard to imagine given still highly restrictive real yields.  Cyclical recoveries are usually fueled by policy accommodation following a steep slowdown or recession.  One possible explanation may be that the US economy is now in expansion mode following a rolling asynchronous earnings recession.  Without policy accommodation, any economic expansion will likely be short-lived and upside in the RTY should be relatively muted.