SMALL CAP INDEXES TEST OLD HIGHS -- GROWTH LEADS VALUE -- MIDCAPS EXCEED 50-DAY AVERAGE -- S&P 500 BOUNCES OFF CHART SUPPORT -- DOW SURVIVES TEST OF 200-DAY LINE WHILE NASDAQ HOLDS UP MUCH BETTER -- WATCHING THE FED AND GREECE

SMALL CAP INDEXES TEST OLD HIGHS... Small cap stocks remain the strongest part of the stock market, and continue to lead the rest of the market higher. Charts 1 and 2 show the S&P 600 Small Cap Index ($SML) and the Russell 2000 Small Cap Index (RUT) in the process of testing their spring highs. Needless to say, a close at a new high by both indexes would be positive for small caps and the rest of the market. The RUT/SPX ratio at the top of Chart 2 has been rising since the start of May and is also nearing a new highs. Leadership by small caps is usually a good sign for the market. Unlike larger cap indexes, daily MACD lines have remained positive since mid-May.

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Chart 1

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Chart 2

SMALL CAP GROWTH LEADS VALUE... Digging down deeper into the small cap space reveals that small cap "growth" is doing better than small cap "value". Chart 3 shows Russell 2000 Growth iShares (IWO) already in record territory. Chart 4 shows Russell 2000 Value iShares (IWN) trading at a two-month high, but well below its April peak. The biggest weightings in small cap growth are technology (26%), healthcare (25%), and consumer discretionary (15%). Small cap value is dominated by financials (41%). Industrials (12%), consumer discretionary (11%), and technology (9%) play smaller roles. The relative strength ratio on top of Chart 4 shows that small cap growth has been doing better than value all year. I take that as a positive sign.

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Chart 3

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Chart 4

MIDCAPS ALSO SHOW IMPROVEMENT ... Midcap stocks are also starting to show chart improvement. Chart 5 shows the S&P 400 Mid Cap Index ($MID) trading above its 50-day average and testing initial resistance at last week's intra-day high (1537). A close above that barrier would be a positive sign for it and the rest of the market. Another encouraging sign is that daily MACD lines are turning positive for the first time this month. The rising relative strength ratio (above chart) shows midcaps doing better than large caps. That's another positive sign. The hourly bars in Chart 6 show the test of last week's high more clearly.

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Chart 5

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Chart 6

S&P 500 BOUNCES OFF CHART SUPPORT... Last Wednesday, I showed the S&P 500 bouncing off sharply off chart support at its early May low. After a modest bounce, the SPX bounced off that support level again this week. While that's encouraging, it now has to clear last week's intra-day high to turn its short-term trend back up again. Its daily MACD lines have been converging over the last week, but remain negative. Those two lines would have to turn positive to support a large cap rally. The hourly bars in Chart 8 show last week's resistance at 2115 more clearly.

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Chart 7

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Chart 8

DOW BOUNCES OFF 200-DAY LINE -- NASDAQ HOLDS UP BETTER... Chart 9 shows the Dow Industrials bouncing off its 200-day line on Monday and its March lows. While that's encouraging, the Dow needs to clear last week's high at 18109 to take it out of danger. The Nasdaq is in much better shape. Chart 10 shows the Nasdaq Composite Index trading above its 50-day moving average. The rising relative strength line (above Chart 10) shows the Nasdaq doing much better than the Dow. That's normally a good sign for both. So is upside leadership by smaller stocks.

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Chart 9

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Chart 10

WATCHING THE FED AND GREECE... The markets are focused this week on the Fed and Greece. The Fed will announce any rate decisions later today, although it's doubtful there will be any big surprises. A rate hike in the autumn seems to be the consensus view. The Greek situation may come to a head over the weekend. I suspect, however, that global markets have already been discounting the possibility of a Greek default. All we can do is follow the charts. The market can't go in either direction without breaking support or resistance levels. That's where we'll take our cues from. The market has a more positive tone this morning. But how it closes the day is more important, especially after the Fed announcement. We'll take another look tomorrow.