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The market’s euphoria over the election of Donald Trump finally succumbed to the inevitable pullback. The question is whether this the early stage of a real correction – or just a bout of doubt following the president’s first legislative defeat.

There are arguments to be made for both cases. The weight of technical evidence we have so far doesn’t lean heavily either way, and that suggests the market has entered a period of uncertainty somewhere between the two.

First, the bad news. Two of the market’s key sectors – small stocks and transports – were conspicuously absent from the gains seen between December and February. That was a strong period for the main stock indexes such as the Standard & Poor’s 500 and the Nasdaq Composite. Yet both the small-cap Russell 2000 and the Dow Jones Transportation Average were flat (see Chart 1).

Chart 1

Dow Jones Transportation Average
And year to date, the S&P 500 is up over 4%, despite a weak March, while the Russell and the transports are slightly in the red.

The negative divergence between these two and the rest of the market is a warning sign. Small stocks tend to lead early in a rally, as they did in November, but lag late. Transports are economically sensitive, and can be canaries in the coal mine when the market starts thinking the economy is not going to grow as expected.

It is true that the broad market is on a losing streak. And it is true that it began March 2, the day after forming an “exhaustion gap” on the charts. This pattern results when overnight demand is so great that the market must jump higher at the open to restore equilibrium. However, because it’s the result of buying by the last bulls, it means all of the market’s fuel is used up – exhausted.

Bulls counter this argument with the pattern on the Russell 2000 itself (see Chart 2).

Chart 2

Russell 2000

While the Russell lagged the market for months, it is still holding support at the bottom of its December-March trading range. In other words, despite its lackluster performance, there has been no technical breakdown. Indeed, it is still above its rising February 2016 trendline and 200-day moving average.

That still leaves us with a quandary. Near-term support at the bottom of the trading range can still break to the downside without ending the major rally. Both the trendline and average are rising to meet “regular” chart support at 1296 from the prior all-time high set in 2015. (The Russell traded at 1351 Monday afternoon.)

That would be a good place to consider turning bullish again, as long as politics – especially tax reform – doesn’t pull the rug out. If it appears that tax reform is running into trouble, then the rally will have lost its raison d’être. The Trump rally was predicated on policies directly targeted to kick-start economic growth. Without it, look out below.

But let’s not get ahead of ourselves for what might happen – or not happen – in Washington. The market today is not that worried.

While March was rather weak, breadth was actually fairly good. The NYSE advance-decline line, which keeps tabs on stocks going up and down each day, is lower now than it was March 1 However, most of the decline happened between March 2 and March 9. Since then, the advance-decline is actually higher.

What this tells me is that there was no wholesale dumping of stocks as the market pulled back. It seems more likely that investors merely took their collective foot off the gas as uncertainty grew. And it seems less likely that failed health-care reform was a bigger factor than a simple rest after a long and strong rally.

Pay attention to both the Russell and the transports. Both tend to forecast what the rest of the market might do. For now, neither is making a strong bull or bear case – and that means investors need not rush into any decisions at this time.