Today, the Dow ended at an all-time high (priced in US$ that is) and the S&P 500 closed at a fresh 52-week high. On the surface, the market looks correction-proof – but under the surface, cracks are starting to show.

It was one month ago that the technical strength of the market began to deteriorate. Since April 16th, their have been some disturbing trends taking place in the market.

Two technical indicators that have historically been fairly accurate gauges of a bull market’s strength are Market Breadth and Leadership. While I track several sophisticated models to measure market breadth, I’m going to stick to a very simplistic view of it for the purpose of this post. I’d like to compare the performance of the Russell 2000 (RUT) which consists of 2000 small–cap stocks versus the Dow Jones Industrial Average (DJI) which consists of the 30 largest US stocks.

Since the close of business on April 16^th, the market has been open for 22 days. The DJI moved up on 18 of those days (82%), where as the RUT only went up 10 days (42%). During that span, the DJI is up slightly over 6%, where as the RUT is down almost 1.4%. That is a 7.4% disparity. A disparity of this magnitude has not taken place since the NASDAQ 100 underperformed the Dow and S&P 500 in similar fashion back in the early spring of 2000.

While breadth is starting to weaken, market leadership has been basically non-existent. Take today for example (5/16). Even though the DJI and S&P 500 are at 52 week highs, only 170 of the 3200+ stocks traded on the NYSE hit 52 week highs. This amounts to only 5% of the total shares traded. Leadership in the NASDAQ is even worse. NASDAQ shares saw an equal number of stocks hit new lows as hit new highs (116 new highs versus 117 new lows). While Large-cap names continue to push the market higher, the majority of stocks are not participating in the late stages of this bull market rally.

Either the underlying technical strength of the market will have to improve for the market to go much higher or we’re at the cusp of a new bear market. It will be interesting to see how it plays out.

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This entry was posted on Wednesday, May 16th, 2007 at 5:24 pm. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.