Sunday, May 9, 2010

A Technical Point On This Correction

All eyes will be on how and where the markets will rebound over the next few days and weeks. One critical thing to keep an eye on is the relative performance between the big and the small, the S&P 500 and the Russell 2000. The small are more volatile and normally decline more vigorously in a bull market correction and climb back faster to new highs. But the small also seem to pick up on major trend changes a little sooner than the big. So the small began misbehaving in mid 2007 before the Dow and the whole market went sour. If you look at what the Russell did over that time relative to the S&P coming out of the late July correction, you see that the small stocks were tardy about climbing off the correction's bottom. First, let's look at the big: (click to enlarge)

Now, let's look at the small:

The same thing happened as we entered the 2001 bear market There, we had a March/April correction (top for tech) in 2000. First, look at the big stocks:

Now compare with the small stock behavior:

The small stock averages seem to know something the big stock averages don't. Small companies are generally more sensitive to major economic turns, and discount such information better (if you're an efficient market theorist as I am).

So one primary thing I'll be watching coming out of our present correction is how the Russell bounces back compared to the Dow and S&P. If the Russell leads, staying mostly above its 140 ema, the bull climb is probably still on. If the Russell seriously lags, it's a rally you may want to sell into.

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