Since February 5, 2010 the stock market has advanced sharply, erasing most of the recent January decline. One important index that has emerged as a leader is the Russell 2000 index. This index tracks most of the small capitalization companies that are traded by the public. When this index leads the market, this is usually viewed by traders and investors as a bullish indication. Essentially, investors are betting that small companies will do well and the economy is strong enough to support them. The Russell 2000 index can be tracked or traded by using the iShares Russell 2000 Index ETF (NYSE:IWM).

While many traders and investors have jumped on board that theory, many others see existing problems. Currently the European Union continues to try and sort out possible bailouts for Greece and many other nations have severe national debt problems. There is also the case that can be made for huge skyrocketing deficits in the United States to grow on a daily basis into the trillions of dollars. Government central banks continue to print money and flood the market place with liquidity. This cannot be healthy in the long run. As proof, look at what happened between 2002 – 2007 when money was free and people were reckless.

Can it be more simple than this? Perhaps we can tell when this stock market is going to pullback or reverse. Can it be as simple as gasoline prices? Every time gasoline gets too high at the pump the stock market seems to pullback or have a small correction. This phenomenon can be viewed by watching the United States Gasoline Fund LP (NYSE:UGA). If one looks at a chart they can simply see that every time that the United States Gas Fund trades above the 38.00 level the stock market pulls back. This phenomenon occurred in late October, and early January. Here we are again as the UGA approaches these high levels.

Remember high gasoline serves as a tax on the consumer. In July 2008 it was high oil and high gasoline prices that broke the back of the stock market. It is still highly unlikely that the U.S. consumer can handle high gasoline prices with an unemployment rate near 10 percent and a foreclosure crisis that is still in full force.

Nicholas Santiago
Chief Market Strategists
InTheMoneyStocks