A Contrast in Market Cap ~ The Risk Averse Alert

Thursday, February 05, 2009

A Contrast in Market Cap

Nice. That's what today was. What else can I say?

Only that it looks like things are about to get better for the long side of the trade.

In a manner much like Tuesday once again the market advanced without an overwhelming display of underlying strength. Of course, this is to be expected given the start today. Yet, despite early weakness, the market's strong turnaround resulted in various technical measures bettering Tuesday's performance. Thus, with greater confidence we can conclude odds of positive follow-through are improving, indeed.

Nevertheless, the market's sideways trade of the past couple months looks to continue. So, even if a solid advance unfolds over the next several days, expect one final pullback prior to melt-up. Whether that fade results in recent lows being challenged again, it is too early even to speculate.

One thing worth noting in support of this outlook is the manner in which various indexes are behaving. Just run your mouse over each of the following charts and ... paying attention to the past four days trading in particular ... you'll get a sense of how in the big picture the stock market is, on one hand poising to move higher, yet on the other hand displaying a dichotomy not suggestive of lasting, underlying strength.

OEX 5-min
NYSE 5-min
NASDAQ 5-min

I have made this point before, but it was some months ago. The longer-term health of the stock market is revealed by the performance of the relatively fewer, widely held, large capitalization issues. The market's "generals" is how I have referred to this group, because in a sense they lead. If conditions affecting large caps reflect softness in the trade, then the broad market soon enough will experience the same.

Seeing the S&P 100 behaving in a relatively weaker fashion, then, supports a view suspecting the market's forthcoming further advance is likely to be followed by another bout of weakness. Thus, my outlook anticipating continuation of the more or less sideways trade over the past couple months is substantiated by the performance of large caps relative to the broad market.

Surely, the most liquid markets exist in widely-held, large cap stocks. That the relative performance of this sector is revealing some greater need to raise capital speaks volumes about the market's more vulnerable position in the big picture.

However, this does not mean the bounce following last year's throttling is ending and another shakedown is about to sweep across the market. Rather, it speaks for near- and intermediate-term prospects, fitting an Elliott Wave view anticipating both a melt-up and a subsequent meltdown.

Here's a look at the same indexes over the past six months. The message is much the same.


You've really got to like today's across-the-board pickup in volume. Expectations for continued buying pressure, near-term, appear well-placed...

Fast Money
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