Richard Shaw | Apr 10, 2013 01:05AM ET
Yes, the S&P 500 is in rally mode — new highs and all that, but it is not a comfortable rally. Something is definitely not right. There are several other market indexes that provide indications suggesting this S&P 500 rally does not have good legs.
In a stock rally you might expect these things to happen, but they are not:
Instead of more aggressive stocks leading this rally, we have more defensive stocks leading. It is a bit hard to imagine a rally going on long and far on the back of defensive stocks. It could happen, I suppose, but that’s not the way it is usually done; and that is a reasonable basis for caution.
So here is the year-to-date rally. It is up nicely so far in this percentage performance chart.
But, here are the non-confirming charts we listed above. Each is a ratio of the performance of one index to the other. To confirm the rally, you would expect the charts to be trending up. A down trending chart is a negative divergence that is some cause for caution. These are all trending down or the uptrend has recently been broken.
Russell 2000 Small-Cap / S&P 500 Large-cap
There is also no confirmation from key countries such as Germany (EWG), China (GXC) and Brazil (EWZ). Japan (EWJ) is rallying, but only on enthusiasm for an all-in/last-ditch effort at stimulation.
We would feel a lot more confident in this S&P 500 rally if the small-cap stocks, growth stocks, high volatility stocks and cyclical stocks were in the lead, but they are not.
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