CatLady,
Are these recent divergences in direction and magnitude between DJ30, SPX, OEX, NDX, etc. high or normal by historical standards?
There have been many past episodes where the major averages have diverged. In these instances, usually the small caps and/or the NASD retrace while the DOW & S&P mostly mark time, i.e., there is a "flight to quality", usually to capture large cap dividends (which, incidentally, are pitifully low these days). However, it's rather unusual to see the DOW and S&P RISING and testing new highs while everything else is re-testing recent lows.
As usual, I have a rather facile explanation for all this. If one believes the reports that the Fed may have intervened in the S&P 500 futures market in late October to support the US market, and I do, then this divergence makes a bit more sense. Since most (all?) of the DOW stocks and all of the OEX are in the S&P 500, it follows that these indexes have moved, more or less in tandem, up from their lows. Other indexes did not have the direct benefit of this "artificial momentum thrust", and therefore have languished, returning to their previous October lows.
In effect, the Fed singled out the NYSE large cap segment of this over-priced market for support, giving these companies much more of a patina of security than they would otherwise deserve. This support is now somewhat self-reinforcing at this point, as was likely the Fed's hope when they intervened in the first place. However, this effect has already worn off the other indexes because they were only peripherally affected, initially moving in sympathy with the futures market. In time, I believe the effect of Fed support will wear off the DOW et al too, barring further intervention.
In other words, all things being equal, I think it is much more likely that the DOW and S&P retrace to their October lows than make and sustain new highs. How's that for a nice wacky theory for what has been a very wacky market. :-D |
