TRADING 04 FUTURES

[TREND1]

***BY ART HILL VERY GOOD
MAJORITY OF SMALL AND MID CAPS ARE BELOW THEIR 50-DAY EMAS... Over the weekend, John Murphy wrote that relative weakness in small-caps was the worst in three years and that this was troubling for the overall market. Relative weakness in small-caps can be seen on the actual price charts and in the breadth indicators. Will small-caps drag down the rest of the market or will small-caps rebound?

For an answer to that question, I am turning to some medium-term breadth indicators. Namely, we are going to look at the percentage of stocks above their 50-day EMAs for the S&P 500, S&P MidCap 400 and S&P Small-Cap 600. This indicator oscillates above and below the 50 percent level. On the face of it, the indicator favors the bulls when more than 50% of the components are above their 50-day EMA and the bears when less than 50% are above. Using the 50% level as the bull-bear threshold, however, results in whipsaws so I added a buffer for signals. A move above 60% is bullish until countered with a move below 40%. A move below 40% is bearish until countered with a move above 60%.

Chart 5 shows the Small-cap Stocks Above 50-day EMA (!GT50SML) in the main window and the S&P Small-Cap 600 in the lower window. There have been six crosses of the 40 and 60 levels in the last eleven months. That is about one signal every two months. Because it is based on a moving average, which is a lagging indicator, this indicator will have some lag and be prone to whipsaws. Despite these drawbacks, the indicator does provide a good internal snapshot for the underlying index. Currently, less than 40% of the 600 stocks in the S&P Small-Cap 600 are above their 50-day EMAs. In addition, the indicator turned bearish on July 17th and has yet to reverse this signal. A move above 60% is needed to turn this indicator bullish and suggest that small-caps will rebound.





Chart 6 shows the MidCap Stocks Above 50-day EMA (!GT50MID) and the S&P MidCap 400. The indicator turned bullish on May 12th and stayed bullish until July 17th, when it moved below 40%. Currently, less than 50% of the stocks in the index are above their 50-day EMAs and this indicator favors the bears. Keep in mind that this is a short to medium term indicator. In addition, the S&P MidCap 400 is in a long-term uptrend, which means that the bearish signal points to a correction, not a major trend reversal. Mid-caps are in between small-caps and large-caps. Chartists can therefore look for this indicator to dip the balance. A break above 60% put mid-caps in bull mode and this would be positive for the market overall.






BUT THE MAJORITY OF LARGE CAPS ARE ABOVE THEIR 50-EMAS... Chart 7 shows the S&P 500 500 Stocks Above 50-day EMA (!GT50SPX) and the S&P 500. In contrast to the prior two, this indicator remains in bull mode. The indicator crossed above 60% on April 22nd and has yet to negate this signal. Currently, over 60% of stocks in the S&P 500 are above their 50-day EMAs. If small-caps are to drag down large-caps, then look for this indicator to break below 50% first and then 40%.