SMALL-CAPS LEADING LARGE-CAPS -- NASDAQ LEADING NY COMPOSITE -- DIA AND SPY ARE LAGGING -- SEMIS HOLDING STRONG -- AMD SURGES ON GOOD VOLUME
A TALE OF TWO MARKETS... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor
The stock market is split in many ways. Small-caps are leading large-caps and techs are leading non-techs. Put another way, large-caps are lagging small-caps and non-techs are lagging techs. Chart 1 shows the Russell 2000 relative to the S&P 100 with the price relative. This is just a ratio of the two indices ($RUT:$OEX). The Russell 2000 represents small-caps and the S&P 100 represents large-caps. The price relative broke resistance two weeks ago and surged to new highs for the year. This breakout shows good relative strength in small-caps. It also shows some serious relative weakness in large-caps. The second part of Chart 1 shows regular price plots for the Russell 2000 (black) and the S&P 100 (red). Notice that the S&P 100 peaked in early May and moved sharply lower the last four weeks. In contrast, the Russell 2000 continued its advance as money flowed into small-caps during May.
Chart 1
Chart 2 shows the same style of chart with the NY Composite and the Nasdaq. The Nasdaq represents tech stocks, while the NY Composite represents non-techs. There is very little overlap in these two indices. The price relative (Nasdaq:NY Composite Ratio) broke resistance in the first half of May and then surged over the last two weeks. Techs have clearly taken the lead as money moves into Nasdaq stocks. On the flip side, the NY Composite is lagging and showing relative weakness. The second part of Chart 2 shows regular price plots for the Nasdaq (black) and the NY Composite (red). Notice that the NY Composite peaked in mid May and moved lower the last three weeks. In contrast, the Nasdaq held up over the last three weeks.
Chart 2
SPY AND DIA LAGGING ... Chart 3 shows the price performance for five major ETFs since May first. The Russell 2000 ETF (IWM), S&P 400 Midcap ETF (MDY) and Nasdaq 100 ETF (QQQQ) are up since 1 May. This confirms relative strength in small-caps, mid-caps and techs. In contrast, the S&P 500 ETF (SPY) and Dow Industrials ETF (DIA) are down since 1 May. This confirms relative weakness in large-caps. These discrepancies also show a seriously split market. IWM, MDY and QQQQ are up over 3% since 1 May, which are pretty darn good moves. DIA, on the other hand, is down over 3%, which is a pretty sharp decline for just five weeks. Even though relative strength in small-caps and techs is positive overall, it is hard to have confidence with such weakness in SPY and DIA.
Chart 3
NASDAQ AND RUSSELL 2000 HITTING RESISTANCE... Even though techs and small-caps are showing relative strength, the Nasdaq and the Russell 2000 are running into a little resistance of their own. Charts 4 and 5 show similar setups for each index. Both declined sharply from October to March and then rallied from mid March to early June. These rallies retraced 50-62% of the October-March declines and carried both indices back to their 200-day moving averages. The yellow areas show resistance zones on both charts. The Russell 2000 and Nasdaq have been moving higher since mid March and remain in 10-12 week uptrends. The late May lows and 50-day moving averages mark support for these uptrends. Look for support breaks to trigger a trend reversal.
Chart 4
Chart 5
SEMIS HOLDING STRONG... Within the Nasdaq and technology sector, the Semiconductor PowerShares (PSI) continues to hold up and show relative strength. Despite a mixed market on Wednesday, the ETF gained over 1.5%. Chart 6 shows PSI in a clear uptrend since mid January. The ETF broke above its 200-day moving average in early May and its 50-day moving average is closing in on the 200-day moving average. This rising 50-day moving average and the trend line extending up from mid January mark support around 16.5. Semis are an important part of the tech sector and we should watch support at 16.5 for any signs of trouble. The bottom indicator shows the price relative (PSI:SPY ratio). This indicator has been trending higher since mid January as PSI continues to outperform the broader market.
Chart 6
AMD SHOWS SIGNS OF LIFE... Advanced Micro Devices (AMD) has been a laggard within the semiconductor group this year, but things could be changing as the stock surged on good volume Wednesday. Chart 7 shows the stock surging in the second half of January and again in early May. A consolidation followed the early May surge and the stock found support around 6.65. Today's surge on good volume reinforces support here and AMD could be preparing to play catch up with the rest of the semiconductor group.
Chart 7
