I recently sat down to watch Tim Burton's "Alice in Wonderland," and immediately had a strange feeling of deja vu. Then it hit me: Time and again I fall down the mainstream financial "rabbit-hole" and enter a world where nonsense is the rule and reality is the ultimate intruder.
Case in point: A major non-confirmation has surfaced in the leading US blue-chip stock indexes. Specifically: the Dow Jones Industrial Average stands at a fresh, one-and-a-half month high, yet the index has failed to surpass its January 19, 2010 peak. But over the same period, the Nasdaq Composite has soared well above its respective January top to touch its loftiest level in one-and-a-half years.
Now, according to the Tweedle-FunDUMental experts, this divergence is a surefire sign of overall market strength and further gains to come. On this, the following March 2010 news items set the positive tone:
- "Dice Loaded In Favor Of The Bulls... The DJIA trailed the Nasdaq Composite Index which indicates a bullish week ahead." (AP)
- "Small Cap Strength Supports Bullish Case. Both small and mid-caps are outperforming, improving the chances of an eventual broad market breakout." (MarketWatch)
- "Nasdaq posts best performance among the major indexes. This suggests that investors' appetite for risk had not totally waned. The current backdrop increasingly appears beneficial for equity markets and we suspect the... [Indices of smaller companies] could be pointing the way for other markets to follow." (Financial Times)
What's Curiouser and Curiouser about this notion is that it isn't true. There is no real evidence to suggest that a rising NASDAQ lifts the tide of the larger markets.
Now for a drink of the reality potion: the March 10, 2010 Short Term Update. In this publication, our analysts present the following close-ups of similar NASDAQ divergences at the two largest market tops of the past ten years: January-March 2000, and October 2007.
AND --
You can see that on both occasions, the secondary NASDAQ indexes continued to rally past the top-tick day in the Dow. In the third chart, (not pictured here) Short Term Update shows both indexes as they stand today and reveals where the overall market could be in the days and weeks ahead.