Rally Those Troops

 | Sep 20, 2011 | 6:45 AM EDT
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Of late, the most interesting charts have, to me, become the Nasdaq relative to almost any other index. We could take the S&P 500 or the Russell 2000, as well, but both have the same look.

I've had to put a lot of data on the chart below, so glance at the longer-term time frame and then we'll "blow it up" so you can see the levels better. Here is the chart of Nasdaq vs. the Russell 2000. What I have circled on the chart are the market lows in March 2003 and March 2009.

Ratio of Nasdaq to Russell 2000 -- Wide Time Frame

Now, below you can see those spikes close-up. Of the three circles, the left one -- hovering in the 3.8 area -- is the March 2003 low. Next is the March 2009 low, and just to the right of that is a fall 2009 low in the Russell. That was when the small-cap index actually fell by 10% in a few short weeks.

Ratio of Nasdaq to Russell 2000 -- Narrow Time Frame

But the current levels of this ratio are clearly due due to the outperformance of Nasdaq, because the S&P relative to the Russell doesn't yield similar results. Typically a turn downward in the ratio would mean a low in the market, and that would surely mean a time to buy small-caps. Back in late August, I thought it had headed downward, but this turned out to be a blip: Since then, the ratio has again lifted itself to higher highs.

It is hard for me to imagine this outperformance will continue if we are to see a healthy market. I say this because the rally is quite narrow in scope -- and that's the case even on the Nasdaq, with its big performance Monday. Once again breadth was negative on the index as down volume swamped up volume. If we add up the last three trading days on this index, we find it has added almost 40 points while net volume (that's up volume minus down volume) has lost 200 million shares.

Thus far, it is only a minor divergence. But, in a market, there are generals and there are troops -- and, without the troops, the generals will not get very far nor last very long. So, unless you believe this is 1999 all over again, those troops better get moving soon!

The Nasdaq is set to be overbought sometime in the latter part of this week. As I have noted, the momentum is still with the bulls -- as we witnessed Monday, with the market coming back from the lows. But, when the market becomes overbought, the negative divergences will begin to matter more if those troops haven't started running with the generals.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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