Sam Collins

Is the Market Tiring?

by Sam Collins   11/18/09


The dollar rebounded early, but then gave back a good portion of the gains, and the market responded by taking back all of the losses and closing with a small plus.

Home Depot (HD) met earnings forecasts for Q3, then reduced estimates for Q4, but TJX Companies (TJX), Saks (SKS) and Pacific Sunwear (PSUN) all reported higher-than-expected earnings. Nevertheless, retailers still fell 1.4%. 

By mid-afternoon, stocks were slightly positive, but then bounced back and forth until a modest rally in the last hour resulted in the small advance, and each of the major indices was able to make a new 2009 closing high. 

Ford (F) stood out yesterday as the big winner, closeing at $8.98, up 3.10%.

At the close, the Dow was up 30 points to 10,437, the S&P 500 (SPX) gained a point to 1,110, and the Nasdaq (NASD) rose 6 points to 2,204. 

With just 972 million shares trading on the NYSE, Chris Wolf, of Cogo Wolf Asset Management, was quoted by the Wall Street Journal saying, "When the volumes are this light, even though the prices are up, you feel like you are standing on a snow bridge in the spring."

On the NYSE, decliners were ahead of advancers by a margin of 16-to-13. Nasdaq traded 597 million shares with advancers ahead of decliners by 10-to-7.

December crude oil rose 24 cents to $79.14 a barrel, and the Energy Select Sector SPDR (XLE) closed at $58.67, off 10 cents.

Gold continued to move higher with the December contract up 20 cents to $1,139.40 an ounce. The PHLX Gold/Silver Index (XAU) rose $1.13, closing at $187.40.

What the Markets Are Saying

An article in yesterday's Wall Street Journal, titled "Divergence Is a Troubling Sign for Rally," discussed one of the early signs of a market that could be turning. As pointed out in the article, "In a robust rally, everything rises in tandem -- small caps, blue chips, etc. -- but when an unsound rally peaks, certain components start to diverge. That happened several weeks ago when small-cap stocks, which have led the March rally by a wide margin, started to sputter and large-caps took over leadership."

The article notes that since March 9 through mid-October, small-cap stocks represented by the Russell 2000 (RUT) rose by more than 80%, beating the Dow and the S&P 500 by more than 25%. But since then, both the Dow and the S&P 500 have been making new highs while the Russell has fallen under its 50-day moving average. And this was true until yesterday when the Russell closed above its 50-day moving average; however that's not really the point.

Small-caps are much more volatile because of lower capitalizations (fewer shares trading) and a host of other reasons. As we look back on the history of the Russell, it often outperforms and underperforms its senior cousins, and the diversions often last for long periods of time and are seldom of predictive value. And part of the reason for that is that comparing small-cap stocks with big caps is like comparing apples and oranges -- they both taste great but have a very different makeup.

However, there is a developing divergence that could have greater implications, and that is the divergence in the Dow's three main indices.  The Dow Jones Industrial Average has been making new highs regularly. In fact, it made a new high yesterday along with the Dow Jones Transportation Average (DJT). However, the Dow Jones Utility Average (DJU) is diverging. The DJU hasn't made a new high since Oct. 19, and is barely holding above its 50-day moving average. 

Most technicians would consider a divergence in the Dow averages to be a potentially important indication that the market is tiring. And our own internal indicators are saying the same.

For now this doesn't appear to be a significant problem, even though the DJU did make a lower low on Nov. 2 than the prior low on Oct. 2. But if it now fails to reverse course with a new high, the signal must be taken more seriously.

As noted yesterday, all of the major indices are overbought as  measured by our internal indicators. It is time to be very cautious.