What's next for the market...technically speaking

Jeff Macke

The Dow Jones Industrial Average (^DJI) and S&P 500 (^GSPC) both made record highs right out of the gates on Tuesday but all is not as good as it seems. Not only did stocks start to get progressively weaker throughout the day, but the selling was most pronounced in the smaller cap names.

Related: Stocks at all-time highs means take profits now: Kilburg

That may seem like nitpicking but there are two good reasons individual investors need to care. First the average stock is badly under-performing the headline index. The average S&P 500 member stock is about 12% below its 52-week high. That means diversified portfolios are most likely lagging the performance of the tape. Since these records only represent 1 or 2% gains for the year that means many if not most investors are in the hole for the year so far.

Oppenheimer technical strategist Ari Wald explains what really has chartists worried about the nature of this rally in the attached clip. “Usually at a turning point you begin to see smaller caps deteriorate before large caps,” he says. “Big caps are making a new high but the Russell 2000 (^RUT) is really just inflecting from its 200 day moving average.”

Related: Market divergence: Dow hits new highs, but small caps still struggling

Past isn’t always prelude but market trends repeat often enough that attention must be paid.

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Not that all is lost for the bulls just yet. “We’re seeing a lot of rotation from early cycle names like consumer discretionary into late cycle games like energy. These are meaningful turns in these areas. Relative to the rest of the market they’ve lagged for a number of years. I think these have legs.”

As yesterday’s failed move illustrated, the market isn’t as simple as buying a fist full of stocks and taking a vacation. Bifurcated markets (a fancy word meaning “at least as many losers as winners”) require patience and selectivity. Legs or not the market is likely to get much more difficult over the next few months.

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