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The Terrible Two Indicator: ominous for stocks Kimble says

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Chris Kimble is the founder of Kimble Charting Solutions, an investment research firm in Salina, Kansas. Chris is a seasoned trader and a master market technician and the charts he draws are both soundly constructed and engaging. You can follow his awesome Tumblr HERE and on Twitter here > @kimblecharting.

The U.S. stock market is facing a rather unique situation that it has only seen twice in nearly four decades, and both instances have preceded major sell-offs. Of course, history never repeats exactly, but frankly this setup has me a bit nervous.

Specifically, only twice in the past 35 years has the NYSE Composite Index been at all-time highs as the small-cap Russell 2000 Index fell below its 200-day simple moving average. That is exactly what we are looking at now.

I call it the ‘Terrible Two’ indicator as the NYSE Composite is hitting record highs just as the Russell 2000 surrenders a closely-watched trend line.

This scenario took place in 1999 and 2007, before U.S. stocks went on to experience sharp bear markets. I’m wondering if 2014 will be a case of third time’s the charm, or if this combination means another voodoo hex for equities.

I’m not exactly sure why the Terrible Two trigger has been so prescient in signaling the dot-com bust and the 2008 financial crisis sell-off. It might have something to do with a confused market and a divergence between blue-chip stocks and riskier small-cap shares.

In any case, there has been turmoil recently below the market’s surface even though the S&P 500 and other major benchmarks are hanging tough near all-time highs. The recent damage has been centered in NASDAQ stocks with high valuations and other high-momentum growth names.

The bottom line is that for U.S. stock investors, it has been a very easy paddle the past couple years as the market hasn’t really suffered any meaningful corrections. But now, eddies are starting to form on the water’s surface.

It remains to be seen whether investors will glide over them once again, or if they’re about to hit some serious whitewater rapids.

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