Saturday, November 14, 2009

The current state of affair



In the regular session, the Dow Jones Industrial Average (INDU 10,271+73.15+0.72%)rose 73 points to 10,270.47, aided by gains in shares of Walt Disney Co.(DIS 30.48+0.04+0.13%) and Goodyear Tire & Rubber Co. (GT 14.39+0.05+0.35%). The S&P 500 Index (SPX 1,093+6.24+0.57%) rose 0.6% to 1,093.48


As Dow Jones Industrial Average continues to move higher, the choppiness underneath is revealing itself in how the rest of the indexes perform.  Investors seem to turn to a conservative approach by buying up the conservative names comprising the Dow Jones Industrial Average.  The S&P 500 index (a much broader-based index) continues to struggle to reclaim 1,100.  The small cap index, the Russell 2000, is trading 5% below its October high.





Dow Jones Industrial Average made a high above the October high





S&P 500 index did not;  it flirted with the October high and came back down, tracing a false breakout


All the above confirms what we have understood two days back when we observed how the S&P 500 index struggled hard to reclaim the 2009 high level.  It is also diverging with the NH_NL index.  The NH_NL index is an advance indicator devised by Dr. Elder and his co-manager Kerry.  It was pointed out days earlier that the reason why the NH_NL is not confirming the S&P 500 index is because investors are buying large caps and abandoning small caps, evident in the dramatic fall in Russell 2000.  The speculative trades that drew speculators into the small caps are washed out of the market.


What can we gleam from the above?  The investors are definitely turning conservative, abandoning their riskier and speculative trades in the smaller caps.  The trend is still up and we will respect that.  We can use dips to load up on positions that we want to get in to.

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