The Russell 2000 and the Nasdaq have been strong outperformers during this pullback. Two cases don't make a pattern, but the two tops made in 2000 and 2007 happened when the small caps were underperforming the S&P 500. So that is not the case here.
It seems everyone is thinking similarly, they will buy dips based on political headlines expecting a resolution by October 17. Now that is the likely scenario, but I wonder if the dip will be so accomodating. It is one thing to buy a 1% dip, but then it is another thing to buy a 1% dip and see that dip go to 4-5%. Most investors are complacent here, and that leaves a lot of room for a big dip when we get closer to that deadline without a deal. And most likely, it will take a stock market selloff to get politicians willing to make a deal.
With the way this market is trading, and the Boehner promise, if we don't have a deal by early next week, you will start seeing VIX break 20 and S&P will break 1650. I view it as highly probably that will be the case, but I am not shorting. With the strength of the small caps, I do think we eventually make new all time highs after the debt ceiling is raised.
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