There is a strong belief that the Fed will hike interest rates in December 2015. So far any rally has been basically about the large-cap stocks. The next stage of any rally needs to be driven by higher beta-growth stocks. The small-caps have largely underperformed since June. Bulls like to see small-cap growth names doing better than large-caps, as it implies markets are betting on a healthier economy. Small-caps have tended to be more tied to domestic growth and inflation expectations than multinational large-caps.

The combination of small-cap strength combined with an emerging market run would likely give the Fed enough confidence to finally raise rates. If small-caps can resume the leadership role in terms of outperforming large-caps, it would indicate growing confidence that a broader-based and sustainable move would occur in equities. This, in turn, should coincide with an increase in inflation expectations.

The recent pattern of “lower highs” and our declining short term cycles suggests rallies will still face stiff upside resistance. All of the major chart cycles are in decline right now, and our short term bias is bearish as a result.

Our intermediate view is that of expecting a bumpy sideways market for a little while. We may even have a minor rally soon but not a meaningful run with a lot of meat. However, around middle of December we may very well have a substantial Santa Claus rally.