MARKET REVERSES HIGHER ON RISING VOLUME -- SMALL AND MIDSIZE STOCKS HAVE STARTED TO ACT RELATIVELY BETTER -- SO HAVE THE TRANSPORTS, RETAILERS, AND HOMEBUILDERS -- THAT'S A SUBTLE SIGN OF MARKET IMPROVEMENT

SMALLER STOCKS ARE STARTING TO ACT BETTER... One of our readers asked for an update on the performance of small cap stocks. Interestingly, they're starting to act better than large caps for the first time in several months. The same is true for midcaps. Charts 1 and 2 show daily bar charts for the S&P 600 Small Cap Index and the S&P 400 Mid Cap Index. Both are attempting to bounce off their January lows. They would of course need to exceed their February highs to reverse their current downtrend. What caught by eye, however was the improvement in their performance relative to the S&P 500 Large Cap Index. The two ratios at the bottom of Charts 1 and 2 have been rising since the start of the year. Chart 3 puts that in better perspective. It plots the SML and the MID relative to the SPX (which is the zero line). In essence, Chart 3 shows their relative performance. It also shows that smaller stocks actually helped lead the market lower since last summer. I remember using that weaker performance during the second half as a sign of market weakness (which was reflected in bad market breadth). The fact that smaller stocks are starting to do better may be hinting at some improvement going on beneath the market's surface. If weaker performance by smaller stocks is bad news, shouldn't stronger small cap performance be good?

Chart 1

Chart 2

Chart 3

MORE SIGNS OF IMPROVEMENT... During the second half of last year, I showed several other groups that were showing relative weakness. Again, I took that as a sign of impending market weakness. They include the Dow Transports (blue line), Retail Holders (green line), the Consumer Discretionary SPDR (red line), and homebuilders (pink line). All four are plotted against the S&P 500 (which is the flat line). After leading the market lower since last summer, Chart 4 shows all of their relative strength ratios jumping since the start of 2008. [The only one that hasn't shown much relative improvement is the financial group which isn't shown here]. I'm not completely sure what that means. But a reasonable guess is that things are starting to improve a bit. If these groups led the market lower, it would seem that their better performance may hinting at a market starting to probe for a bottom of some type. Maybe not a final bottom. But at least an intermediate bottom. We'll of course need to see better market action to confirm that. But there are early hints at improvement in what had been the market's weakest groups.

Chart 4

NATURAL GAS STILL LEADING ENERGY COMPLEX HIGHER ... With crude oil hitting another record, energy stocks were once again the day's strongest sector. But not all energy stocks are rallying equally. I recently wrote articles on the new upside leadership coming from natural gas stocks (and natural gas itself). That trend continued even today. While energy was the day's top sector, natural gas was the biggest percentage gainer. Chart 5 plots three energy indexes relative to the S&P 500 since last August. The Natural Gas Index (blue line) has outdone the S&P 500 by 34% since August. The Energy SPDR (red line) has done 21% better, while the Oil Service Holders (green line) did 18% better than the S&P. The reason for the stronger performance by natural gas can be seen the relative strength in the commodity. Chart 6 plots the Natural Gas ETF (UNG) against the Crude oil ETF (USO). The natural gas/crude oil ratio bottomed at the end of December and has been rising since then. While the media stays focused on record crude prices, bigger money is being made in natural gas. Let's keep that to ourselves.

Chart 5

Chart 6

MARKET REVERSES HIGHER ON BETTER VOLUME... After trading sharply lower this morning, the market reversed higher later in the day and it did so on rising volume. In fact, the two biggest volume days this week were on up days (Tuesday and today). The suggests to me a market that is trying to probe for a bottom. Chart 7 shows the NYSE Composite Index still trading over its January low, but well below its February high. It would have rise above the latter number to turn its short-term trend higher. Chart 8 shows the Nasdaq Composite also closing higher on rising volume. The Nasdaq is the only one of the major stock indexes to hit a new 2008 low. However, its 14-day RSI line (solid line) shows some short-term positive divergence. That suggests an oversold market that is trying to rebound. The Nasdaq is also starting to show better relative strength. Next to small-caps, it was the biggest percentage gainer today. Add that to the list of former market laggards that are starting to show better relative strength. None of these factors are enough to turn me bullish on the market. But they are turning me a little less bearish on the short- to -intermediate market trend.

Chart 7

Chart 8