LARGE AND GROWTH LEAD, DIA CHALLENGES HIGHS, IWM BOUNCES, SMALL-CAP BREADTH LAGS, TAIL VERSUS DOG, DEFENSE-AEROSPACE ETFS HIT SUPPORT, FOUR DEFENSE STOCKS

LARGE-CAPS AND GROWTH SHOW RELATIVE STRENGTH... Link for today's video. Stocks surged on Friday, but small-caps and mid-caps lagged with smaller gains. In fact, looking at one-month performance for several major index ETFs, we can see that large-caps are leading and small-caps are lagging. Chart 1 shows a screen shot of the summary for a ChartList containing 18 major index ETFs and this list is sorted by one-month percentage change. The performance differential is quite stark. The Dow Diamonds (DIA), S&P 500 SPDR (SPY) and other large-cap ETFs are up, while the Russell 2000 iShares (IWM), S&P MidCap SPDR (MDY) and Russell MicroCap iShares (IWC) are down. Small-caps and mid-caps are lagging based on this one-month metric.

Chart 1

Chart 2 shows this same list sorted by the StockCharts Technical Rank (SCTR) and a similar picture emerges. QQQ, the Russell 1000 Growth (IWF) and the S&P 100 ETF (OEF) are leading with the highest SCTRs. The S&P SmallCap iShares (IJR), Russell 2000 iShares (IWM) and Russell 1000 Value (IWD) are lagging with the lowest SCTRs. There are two takeaways here. First, large-caps are outperforming small-caps. Second, growth is leading value. Large-caps account for the bulk of the stock market and relative strength is growth stocks shows a healthy appetite for risk.

Chart 2

DIA CHALLENGES HIGHS, BUT IWM FALLS SHORT... We can also see the small-large differential play out when comparing the charts for the Dow Diamonds (DIA) and the Russell 2000 iShares (IWM). Chart 3 shows DIA with a gap and triangle breakout on Friday. The big trend is up as the ETF hit a new high in early March. DIA digested the February surge with a triangle consolidation and the breakout signals an end to this consolidation - and a resumption of the bigger uptrend. It is now important that the gap holds. A move back below 179 would fill the gap and this would be quite negative. The lows extending back to mid April mark key support at 177 and a close below this level would be bearish.

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Chart 3

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Chart 4

Chart 4 shows IWM with a gap-surge on Friday, but the ETF has yet to clear the first resistance zone and remains well below the April highs. Note, however, that the March and April highs were 52-week highs and the long-term trend is still up for IWM. Short-term, there are some issues because the April support break remains and the ETF shows relative weakness the last three weeks. Follow thru above 124 is needed to break above this resistance zone.

SMALL-CAP BREADTH IS LAGGING... Chartists can also use breadth indicators to measure "internal" strength or weakness. Chart 5 shows AD Percent for the S&P 1500, S&P 500, S&P MidCap 400, S&P Small-Cap 600 and Nasdaq 100. AD Percent equals advances less declines divided by total issues. It is simply Net Advances as a percentage of the total. Notice that S&P 500 AD Percent ($SPXADP) was +83% on Friday and the strongest of the group. S&P SmallCap AD Percent ($SMLADP), on the other hand, was +33% and the weakest of the group. Large-cap breadth showed relative strength and small-cap breadth showed relative weakness. The blue horizontal lines are set at +70% and -70% to identify strong surges in either direction. Notice that S&P 500 AD Percent is the only one that exceeded +70% twice this month. This also shows relative strength in large-cap breadth.

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Chart 5

THE TAIL VERSUS THE DOG... Chart 6 shows the Russell 2000 relative to the S&P LargeCap 100 using the price relative ($RUT:$OEX ratio). The Russell 2000 (small-caps) outperforms the S&P LargeCap 100 when this ratio rises and underperforms when this ratio falls. The last big period of small-cap underperformance occurred from March 2014 to September 2014 (yellow area). The S&P 500 touched 2000 in July and September, but fell back to the 1900 area with the October plunge. The worst we can say about relative weakness in small-caps during this period is that the S&P 500 was flat. Thus, relative weakness in small-caps can hinder the broader market, but it does not always break the broader market. According to the S&P website, the S&P 500 "captures approximately 80% coverage of available market capitalization". The S&P 500 is the dog and the Russell 2000 is the tail.

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Chart 6

AEROSPACE-DEFENSE ETFS BOUNCE... With small-caps underperforming, the performance preference goes to large-cap stocks and I noticed some moves in the Aerospace & Defense industry recently. The iShares Aerospace & Defense ETF (ITA) and the Aerospace & Defense ETF (PPA) are not the most exciting ETFs, but they are in uptrends and it looks like their corrections are ending. Chart 7 shows ITA breaking ascending triangle resistance in early February and hitting new highs into early April. The ETF pulled back the last four weeks, but I view this as a correction within an uptrend. ITA formed a falling flag and is going for a breakout with a bounce the last two days. The indicator window shows the SCTR holding above 60 in early May and turning up last week.

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Chart 7

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Chart 8

Chart 8 shows PPA with a breakout in February and new high in late February. The ETF corrected with a falling wedge the last two months and bounced off broken resistance the last two days. Again, I think the bigger trend is up because of the 52-week high. The falling wedge is typical for a correction within an uptrend and a breakout at 37 would signal a continuation higher.

GENERAL DYNAMICS, HONEYWELL, RAYTHEON AND UNITED TECH... Chart 9 shows General Dynamics (GD) breaking out of a long consolidation with a gap and big move the last two weeks. The SCTR is also perking up with two moves above 60 this month. Chart 10 shows Honeywell (HON) surging in October-November and then working its way higher into March. The stock then corrected the last seven weeks with a falling wedge and surged off support the last two days. HON is certainly a boring stock, but the trend is up and a breakout is in the works.

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Chart 9

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Chart 10

Chart 11 shows Raytheon (RTN) with a rather volatile uptrend and new high in mid March. The stock corrected the last seven weeks with a falling channel and then surged off support in the 104 area the last two days. Again, this bigger trend appears to be up and the decline to 104 looks like a correction. A breakout at 108 would end this correction and signal a continuation higher. Chart 12 shows United Technologies (UTX) firming near the 38% retracement and breaking a wedge trend line with a surge the last two days.

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Chart 11

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Chart 12

WEBINAR ON TUESDAY... Note that I will be doing a Webinar on Tuesday at 1PM ET with lots of charts. I am currently bullish on stocks and have been for months. There are always "concerns" out there, such as relative weakness in small-caps and weakening breadth, but I need an actual bearish signal and signs of increased selling pressure before turning bearish. In other words, the trend is in force until proven otherwise. On Tuesday, I will detail the support levels and breadth indicators I am watching and what it would take to prove my bullish stance otherwise. Click here to register.