Major Split in Market Puts Pressure on the Bulls

Dramatic divergence exists between higher-quality stocks and lower-quality issues

   
Major Split in Market Puts Pressure on the Bulls

Thursday closed mixed with the S&P 500 gaining 0.1% and the Nasdaq up 0.2%, but the Dow Jones Industrial Average fell 0.1%. The loss by the Dow industrials halted a three-day winning streak for the blue-chip index.

Losses in American Express (AXP) and UnitedHealth (UNH) held the index down. And IBM (IBM) fell after reporting lower earnings and revenues that missed estimates by $500 million. Google (GOOG) reported lower-than-expected quarterly revenue and earnings.

Although trading was flat, volume was higher than normal for a day before a long holiday weekend due to the expiration of April options.

At Thursday’s close, the Dow was off 16 points at 16,409, the S&P 500 rose 3 points to 1,865, and the Nasdaq gained 9 points at 4,096. The NYSE primary market traded 831 million shares with total volume of 3.3 billion shares. The Nasdaq crossed 1.9 billion shares. On the Big Board, advancers outpaced decliners by 1.4-to-1, and on the Nasdaq, advancers led by 1.8-to-1.

For the week, the Dow rose 2.4%, the S&P 500 gained 2.7%, and the Nasdaq was up 2.4%.

04 21 14 spx 300x189 Major Split in Market Puts Pressure on the Bulls
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chart key 300x84 Major Split in Market Puts Pressure on the Bulls

The S&P 500 has been overcoming resistance and has reclaimed its near-term uptrend. By rallying through the significant resistance of the 1,813-1,850 band and closing above its 50-day moving average at 1,851, the index appears capable of challenging resistance at 1,885. And the all-time high at 1,897 is also within reach. Internal indicators — the stochastic, momentum and MACD — have turned up, providing added support.

04 21 14 rut 300x190 Major Split in Market Puts Pressure on the Bulls
Click to Enlarge

The Russell 2000 small-cap index rallied above both its 200-day moving average, which it had pierced, and the resistance line at about 1,120. This places the current rally well below its 50-day moving average with massive continuous resistance to its late April high. Its internal indicators are positive like the S&P 500′s, but not nearly as strong.

Conclusion: There is a dramatic divergence between the higher-quality stocks represented by the S&P 500 and Dow, and the lower-quality stocks represented by the Russell 2000 and Nasdaq. The quality stocks appear ready to blast to new highs while the lower-quality issues continue to struggle. In technical language, this is called a “bifurcation,” which means that there is a major split in the broad market of stocks.

Our internal indicators are split as well. MACD, stochastics, momentum and RSI favor the better-quality stocks, while the high-P/E, more speculative issues are very slowly turning up.

The sentiment indicator I favor is the AAII Sentiment Survey. On Thursday, it recorded only 27.22% bullish, the lowest reading since July 19, 2012, when the Dow was at 12,943 and the S&P 500 was at 1,377. This survey is a contrary indicator since history has shown us that public investors are usually wrong. In other words, the low bullish reading is bullish for the broad market.

The big caps are acting well, but the small caps are weak. The primary trend is that of a bull market, the intermediate trend is sideways, and the short-term trend is up. But even if the better-quality stocks break to new highs, the overall market may not follow unless they pick up huge blocks of supporting volume. With just eight trading days remaining in April, the bulls are under pressure to turn the month into its usual success, which averages a gain of about 2%.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

Thursday closed mixed with the S&P 500 gaining 0.1% and the Nasdaq up 0.2%, but the Dow Jones Industrial Average fell 0.1%. The loss by the Dow industrials halted a three-day winning streak for the blue-chip index.

Losses in American Express (AXP) and UnitedHealth (UNH) held the index down. And IBM (IBM) fell after reporting lower earnings and revenues that missed estimates by $500 million. Google (GOOG) reported lower-than-expected quarterly revenue and earnings.

Although trading was flat, volume was higher than normal for a day before a long holiday weekend due to the expiration of April options.

At Thursday’s close, the Dow was off 16 points at 16,409, the S&P 500 rose 3 points to 1,865, and the Nasdaq gained 9 points at 4,096. The NYSE primary market traded 831 million shares with total volume of 3.3 billion shares. The Nasdaq crossed 1.9 billion shares. On the Big Board, advancers outpaced decliners by 1.4-to-1, and on the Nasdaq, advancers led by 1.8-to-1.

For the week, the Dow rose 2.4%, the S&P 500 gained 2.7%, and the Nasdaq was up 2.4%.

SPX Chart

The S&P 500 has been overcoming resistance and has reclaimed its near-term uptrend. By rallying through the significant resistance of the 1,813-1,850 band and closing above its 50-day moving average at 1,851, the index appears capable of challenging resistance at 1,885. And the all-time high at 1,897 is also within reach. Internal indicators — the stochastic, momentum and MACD — have turned up, providing added support.

RUT Chart

The Russell 2000 small-cap index rallied above both its 200-day moving average, which it had pierced, and the resistance line at about 1,120. This places the current rally well below its 50-day moving average with massive continuous resistance to its late April high. Its internal indicators are positive like the S&P 500′s, but not nearly as strong.

Conclusion: There is a dramatic divergence between the higher-quality stocks represented by the S&P 500 and Dow, and the lower-quality stocks represented by the Russell 2000 and Nasdaq. The quality stocks appear ready to blast to new highs while the lower-quality issues continue to struggle. In technical language, this is called a “bifurcation,” which means that there is a major split in the broad market of stocks.

Our internal indicators are split as well. MACD, stochastics, momentum and RSI favor the better-quality stocks, while the high-P/E, more speculative issues are very slowly turning up.

The sentiment indicator I favor is the AAII Sentiment Survey. On Thursday, it recorded only 27.22% bullish, the lowest reading since July 19, 2012, when the Dow was at 12,943 and the S&P 500 was at 1,377. This survey is a contrary indicator since history has shown us that public investors are usually wrong. In other words, the low bullish reading is bullish for the broad market.

The big caps are acting well, but the small caps are weak. The primary trend is that of a bull market, the intermediate trend is sideways, and the short-term trend is up. But even if the better-quality stocks break to new highs, the overall market may not follow unless they pick up huge blocks of supporting volume. With just eight trading days remaining in April, the bulls are under pressure to turn the month into its usual success, which averages a gain of about 2%.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, http://investorplace.com/2014/04/daily-stock-market-news-major-split-market-puts-pressure-bulls/.

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