Monday, March 22, 2010

Divergences Within and Across Stock Markets

What do Materials shares (XLB; top chart) have in common with Energy stocks (XLE; second chart from top), Technology issues (XLK; second chart from bottom), and Health Care stocks (XLV; bottom chart)?

All have failed to better their January highs despite new bull market highs in the major stock market indexes.

This might just be a sign of large cap underperformance, given the solid bull highs seen among midcap ($MID) and small cap ($SML) shares, as well as the new highs seen in the advance-decline line for common stocks on the NYSE and the number of stocks making fresh 52-week highs.

What gives me pause is that many international equity indexes have also failed to exceed their January highs. Those include EFA (stocks from Europe, Far East, and Australasia) and EEM (emerging market stocks).

As long as the indicators plow to new highs and we see small cap and NASDAQ stocks outperforming the S&P 500 Index, I continue to lean to the bull side per the recent indicator update. Should we see those smaller cap and more speculative issues roll over, however, and generate deterioration in the indicators alongside lagging in these sectors and international indexes, then I would become more aggressive in looking to the downside for stocks.