Market internal indicators continue to suggest that equity markets are likely to move materially higher over the coming weeks. The Advance Decline Line and New High new Low Indices for the NYSE, AMEX and NASDAQ are more or less at new highs. Usually weakness in the major market indices, such as the Dow, S&P 500 and Nasdaq is preceded by a break down in market internals. We would be worried about the sustainability of the advance in the S&P 500 if the recent highs in the S&P 500 were not being confirmed by new highs in market internal indicators, obviously this is not the case.
A quick way of looking at the health of the underlying market is to look at the relationship between small caps (the Russell 2000) and large Caps (the S&P 100). If small caps are outperforming large caps then it is reasonably safe to conclude that market internals are healthy. OK so how would we define small caps outperforming large caps? We use the 120 day Rate of Change of the relative of the Russell 2000 and S&P 100. If the 120 day ROC is positive it denotes outperformance. The graph below clearly suggests that the Russell has been outperforming the OEX since mid April and last night the relative closed at another multi-week high. This is all supportive for continued upside.
Whilst market internals remain healthy we see any weakness in the major market indices as a buying opportunity rather than selling.
Our wealth creation portfolio is up 18% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.
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