SEVERAL GROUPS ARE STALLED NEAR FEBRUARY HIGHS INCLUDING RUSSELL 2000, BROKERS, AND TRANSPORTS -- NASDAQ RELATIVE STRENGTH RATIO FALLS TO NEW 2007 LOW -- AON REPRESENTS ANOTHER INSURANCE BREAKOUT

RUSSELL 2000 IS STALLED AT FEBRUARY HIGH ... In trying to decide if the market is on the verge of a pullback, one of the clues we look for is whether or not some of the weaker market groups are able to move above their February highs. If they can, the uptrend continues. If they can't, a pullback could ensue. One of the stock indexes that is stalled at its February high is the Russell 2000 Small Cap Index (RUT). Chart 1 shows the RUT trading below that previous peak near 830. The RUT relative strength ratio (bottom of chart) has been dropping since February as well. Part of the reason is recent investor preference for large cap stocks. Interestingly, the beginning of the rotation toward large cap stocks started exactly a year ago. Chart 2 overlays the RUT/SPX ratio (solid line) over the Russell 2000 Small Cap Index since the start of 2006. The peak in the ratio last May coincided with a market correction. The ratio had held up reasonably well until late Febraury. It has since broken down. That certainly confirms that the six-year cycle of small cap leadership has probably ended. But it may also increase the odds for a general pullback.

Chart 1

Chart 2

BROKERS AND TRANSPORTS HAVE YET TO BREAKOUT... Brokerage stocks have made a nice comeback from their March low. However, the AMEX Broker/Dealer Index (XBD) has stalled at its January/February peak (Chart 2). Its relative strength ratio is well below its early 2007 highs. Some of today's selling in the financial sector came from brokerage stocks. Since these are often viewed as leading indicators for the rest of the market, their inability to reach a new high is a short-term caution sign. The same is true of the Dow Transports. I recently wrote about the Dow Theory requiring the transports to hit a new high to confirm the uptrend in the Dow Industrials. Chart 3 shows the Dow Transports trading back below its February high. Its RS ratio is also starting to drop. No serious trend damage has been done to either chart. But their relative weakness is a potential caution sign.

Chart 3

Chart 4

AON HITS EIGHT-YEAR HIGH ... Last week I started focusing on insurance stocks that were starting to show new signs of market leadership. That trend continued today with two of the top percentage gainers in the financial sector coming from the insurance group -- AON and Aflac. I was especially impressed with the former. The daily bars in Chart 5 show AON closing over its spring 2006 high near 42 and on rising volume. The recent upturn in the insurer's relative strength ratio (bottom of chart) is also noticeable. That trend toward relative strength can be seen better in the monthly bars in Chart 6. That chart also shows that AON is now trading at the highest level since 1999.

Chart 5

Chart 6

NASDAQ IS REALLY UNDERPERFORMING... Another potential short-term problem is the continuing underperformance by the Nasdaq. No serious chart damage has been done. But there has been some deterioration. The daily MACD lines have turned negative for the first time in two months. Selling on Thursday and today also came on heavier volume. Those are warning signs. A more serious sign of new selling would be a decisive close below the late February peak at 2531. What really worries me, however, is the drop in the Nasdaq/SPX ratio (solid line) to a new 2007 low. Chart 8 shows why. It overlays the COMPQ/SPX ratio over the Nasdaq Composite since the start of 2006. There are three points of interest on the chart. The drop in the ratio last May which coincided with a market correction. An upturn in the ratio last August which launched a new market upleg. And today's drop to a new 2007 low. Historically the market does better when the Nasdaq is leading it higher. It doesn't when the Nasdaq is showing serious relative weakness.

Chart 7

Chart 8