Watch Those Transports

 | Sep 05, 2012 | 6:30 AM EDT
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The oversold condition I discussed Tuesday helped bring the S&P 500 from down to flat, but it's clear all the action was in the small-caps: The Russell 2000 soared more than 1%. The market is still oversold, but let's take a look at the chart of the S&P relative to the Russell, considering the outsized move Tuesday.

As a reminder, when the ratio is high the Russell tends to be at or near a low. When the ratio is low, the Russell tends to be at or near a high. As you can see, the red line on the chart shows this chart has come down quite a way. Should the Russell go back to underperforming, thereby forcing the ratio to tick back up, as it did in early July in March (both circled), it would be bearish for the broad market.

S&P 500 vs. Russell 2000

But let's discuss the transports. After the bell, FedEx (FDX) warned it would miss on its fiscal first quarter and guided down based on global weakness. I now see lots of folks patting themselves on the back, jumping out of the woodwork to tell us how they saw the weakness in the transports. My gosh, is there anyone who didn't see the weakness in the transports? This is not rocket science -- the group has been weak for months now. I must have harped about it at least a dozen times.

Of course, it's important to keep tabs on the reaction to the news. I say that because, in the middle of the trading day, Halliburton (HAL) announced it would miss on the third quarter, and the stock tanked before rallying $1 off its low. As we all know by now, I am not and have not been a fan of the oil-services stocks for weeks now, so I keenly watched the reaction to this Halliburton news and within the Market Vectors Oil Services ETF (OIH) itself. As bad as the OIH looks, the fund still didn't take out the low from last Thursday. I think it will eventually do so, but on this particular news it did not.


This brings us back to the Dow Jones Transportation Average. The low on the day Tuesday was 5056, which happened to be off a trendline. If the transports cannot break 4950 on this FedEx news, it won't make for a good chart now, but it will tell us too many short positions are currently embedded, and that the oversold condition won't allow for more downside right now. If the index does manage to break that uptrend line in a meaningful way, there will still be support all the way down, but the longer-term target would then be back near 4600.

Dow Jones Transportation Average

In the meantime, on Tuesday the number of stocks making new highs rose to levels we hadn't seen in weeks. I think it was all the Russell's doing -- the statistics tend to improve along with that index. I maintain that the market is mixed, and that even once the market gets through this moderate oversold condition, the long-term divergences and the sentiment will remain a problem for the market.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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