We're not out of the woods just yet....

On Wednesday, one of the most anticipated Fed announcements in some time occurred and it was a pleasant surprise to investors. Stocks soared after Bernanke said the Fed would curtail monthly bond buying (QE) to $75 billion, with the $10 billion monthly haircut viewed as tepid and thus bullish for equities. Investors were also relieved to learn for certain that tapering would come in the form of measured, gradual reductions and not in a more abrupt and severe fashion, which could have adversely shocked our still-fragile economy. Bernanke further described economic activity as improving and exhibiting underlying strength, but that the Fed would continue with asset purchases as long as unemployment remained elevated. Finally, it was made clear that current interest rate targets would remain in place even after the rate of unemployment fell below 6.5%, an indication the Fed planned to remain quite dovish despite the imminent changing of the guard with incoming Yellen. All in all, this announcement threaded the needle masterfully.

The S&P 500 Index shot up 1.7% for the day with the mega-cap DJ Industrials surging 1.8%. However, the flatter, more equal-weighted Russell 2000 Index rose just 1.3% on Wednesday, noticeably lagging behind its larger-cap counterparts. Given the bullish firepower that came with the Fed statement, I would've expected to see the generally higher beta small-cap stocks surpass the performance of larger-caps, especially since small-caps tend to have a higher sensitivity to the domestic economy. But such relative price action was not to be.

Source: Stockcharts.com

The upper-most chart above shows the DJ Industrials decisively breaking out of a flag formation, the middle chart shows the S&P 500 trying to break out of what appears to be a broadening wedge formation, and the bottom chart displays the Russell 2000 having yet to make a new high. None of these charts look overly concerning or bearish per se, but it goes without saying the near-term outlooks become less bullish as the cap size shrinks. Generally we want to see smaller-caps fully participating in, if not leading, a robust move for equities, serving to confirm underlying strength in the advance. We're obviously not seeing that yet. 

With Wednesday's surge, it was encouraging to see a spike in the 10-day moving average of the NYSE up/down volume:

The indicator has risen from -100 to near 50 in a matter of days, a good sign. It stalled a bit yesterday, but it's still early and another spike upward could occur soon. However, if it were to remain under 100, not to mention 50, over the next few days, odds increase that this pop in the market could lack follow through or roll over. Stay tuned.

One significant tailwind for stocks at this point in time is the seasonal calendar. Starting last week, we have entered one of the best three-week periods of the year for equities.

On average, stocks have performed extraordinarily well from mid-December through the first week in January. And in that time, small-caps tend to outperform large-caps. 

The charts above showing the Russell 2000 lagging the larger-cap indices are concerning, but if history is any guide I would expect small-caps to soon outdistance their larger-cap brethren. Failing to do so will only raise concerns heading into the new year.