Large Are Leading

08/25/06 08:40:59 AM

by Arthur Hill

Large caps are taking the initiative as the S&P 100 outperforms both the NASDAQ and the S&P SmallCap Index.

Security: $OEX
Position: Hold

Relative performance is important, and the Standard & Poor's 100 is leading the S&P SmallCap Index and NASDAQ in 2006. The S&P 100 represents stocks with the largest market capitalizations, and these include General Electric, ExxonMobil, Johnson & Johnson, Microsoft, and Pfizer. These companies have market capitalizations in excess of $190 billion. The NASDAQ represents the technology sector and the S&P SmallCap Index represents small-cap stocks. There is some overlap between the S&P 100 and NASDAQ, but none between the S&P 100 and S&P SmallCap Index (Figure 1).

FIGURE 1: SMALL CAPS, NASDAQ, OEX. The price relatives for the small caps and the NASDAQ have risen sharply since April (red box).

Graphic provided by: MetaStock.

The top indicators show the price relative, and this shows the performance of OEX with regard to the S&P SmallCap Index and NASDAQ. It is a simple ratio plot of OEX divided by the other index. OEX leads when the price relative rises and lags when the price relative declines. As you can see from Figure 1, both price relatives have risen sharply since April 2006 (red box). Prior to that, both price relatives declined from April 2005 to April 2006. OEX has clearly taken charge over the last four to five months.

We can also see relative strength just by looking at price levels. In Figure 2, we can see that OEX is currently challenging its May high, while the NASDAQ and S&P SmallCap Index remain well below their May highs (gray boxes). In fact, these two indexes have yet to even break above their June highs.

FIGURE 2: NASDAQ, SMALL CAP, OEX. OEX remains in an uptrend, but there is resistance around 600.

Graphic provided by: MetaStock.

OEX remains in an uptrend, but there is considerable resistance around 600. The index moved above 600 in May and abruptly reversed the very next week with a long black candlestick (blue oval). The index closed above 600 in mid-August and stalled the very next week. A little stalling is acceptable and a break above 605 would affirm the bull. A failure to break above 600 would bring about the possibility of a double top, which is a bearish reversal pattern. However, this pattern would not be confirmed unless the index breaks the July low at 560.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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