Sunday, August 15, 2010
High Risk Leading the Way Lower
The market appears to be in a small 4th wave treading sideways that should result in a sharp pop higher to close the S&P gap I mentioned late last week, or just head to new lows as a continuation of Friday's late day move lower. That should create a nice 5 wave decline from the highs of a week ago. And the correction of that 5 wave drop should be a good opportunity for bears to get short, or add to existing short positions.
Above you can see a list of indices and what percentages they closed at Friday. Notice that the Nasdaq and the small caps, both very high risk indices, are leading the charge lower especially compared to the Dow. When investors flee their high risk assets, especially over a decent period of time, it usually means their is an underlying fear and lack of confidence in the market. The Dow has the most solid blue chip stocks in the market so many folks who just absolutely have to stay in stocks are probably piling into the bluest of the blue chips in the Dow. That's why the Dow is far outperforming the higher risk asset indices. When you combine this with the lackluster volume on rallies and impulsive decline we're seeing now in with stocks, it appears the larger trend is down. I'd be looking to align myself with that trend and get short when the opportunity presents itself.
The above daily charts illustrate my point. The higher the risk in the index, the more it seems to be lagging the blue chip Dow. The Dow was making new highs while the higher risk assets were not. Now the high risk indices are declining much more aggressively than the Dow. Their weakness and non-confirmation of new Dow highs was the first indicator that a big top was forming a week ago. Now their leading the charge lower. And you can even label the Russell's June decline as a 5 wave impulsive move, and the ensuing rally is clearly a 3 wave affair, whic is a correction.
So there has been no let up in this flight from risk. When these high risk indices break their July lows it should be a good indicator that S&P and the Dow will follow shortly, and could hint that a much larger decline is underway.
PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.