Sam Collins

Is the Market Tiring?

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The article notes that since March 9 through mid-October, small-cap stocks represented by the Russell 2000 (RUT) rose by more than 80%, beating the Dow and the S&P 500 by more than 25%. But since then, both the Dow and the S&P 500 have been making new highs while the Russell has fallen under its 50-day moving average. And this was true until yesterday when the Russell closed above its 50-day moving average; however that's not really the point.

Small-caps are much more volatile because of lower capitalizations (fewer shares trading) and a host of other reasons. As we look back on the history of the Russell, it often outperforms and underperforms its senior cousins, and the diversions often last for long periods of time and are seldom of predictive value. And part of the reason for that is that comparing small-cap stocks with big caps is like comparing apples and oranges -- they both taste great but have a very different makeup.

However, there is a developing divergence that could have greater implications, and that is the divergence in the Dow's three main indices.  The Dow Jones Industrial Average has been making new highs regularly. In fact, it made a new high yesterday along with the Dow Jones Transportation Average (DJT). However, the Dow Jones Utility Average (DJU) is diverging. The DJU hasn't made a new high since Oct. 19, and is barely holding above its 50-day moving average. 

Most technicians would consider a divergence in the Dow averages to be a potentially important indication that the market is tiring. And our own internal indicators are saying the same.

For now this doesn't appear to be a significant problem, even though the DJU did make a lower low on Nov. 2 than the prior low on Oct. 2. But if it now fails to reverse course with a new high, the signal must be taken more seriously.

As noted yesterday, all of the major indices are overbought as  measured by our internal indicators. It is time to be very cautious.

Today's Trading Landscape

Earnings to be reported include: 012 Smile Communications, BJ's Wholesale Club, Chico's FAS, China Sunergy Co. Ltd., Cyberonics, Donaldson, Elbit Systems, Gushan Environmental Energy Ltd., Gymboree, Hot Topic, Jack in the Box, Limited Brands, Navios Maritime Holdings, NetApp, Pennantpark Investment Corp., Perry Ellis International, PetSmart, Semtech and Woodward.

Economic reports due: MBA purchase applications, consumer price index (the consensus expects 0.2%; 0.1% less food and energy), and EIA petroleum status report.

Late news: Housing starts decreased 10.6% to a seasonally adjusted 529,000 (consensus expected 600,000).  

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