More Disturbing Analysis. 3/3/2010

The top chart shows the 50-Leaders since early in December - just before the Santa Rally took off.

The bottom chart is a ratio chart of Small Ordinaries to the 50-Leaders.OK, in a bullish market we would expect punters to be willing to take on risk. This means that a bias for Small Cap stocks over Large Cap stocks (relatively) would show up in the charts. The ratio of XSO:XFL should rise in a bullish market and fall in a bearish market.

If it doesn't, something is out of whack in the markets. Okey Dokey?

Since the 12th February, the trend in the XSO:XFL chart has been down and is now almost level with the area it was at in early February, when the current uptrend began.

This divergence is concerning. It means that this rally has been the result of punters putting money into the big cap stocks while (relatively) ignoring the small caps.

No wonder I've been describing this rally as "stodgy" - it doesn't have a lot of money going into a broad range of stocks.

Eventually, sooner rather than later, this rally should collapse. Of course, some significant news could come out and punters might get a renewed love for the Small Ordinaries and Risk.

But the probabilities lie with the down side.

Cheers

Red