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Summary

  • The divergence between large caps and small caps has been ominous in recent weeks.
  • Today, large caps are breaking down - indicating a failed breakout.
  • As investment managers unload risk, the breakdown in blue chip stocks could continue.

"Help me Obi Wan Kenobi - you're my only hope."

- Princess Leia in Star Wars

With the ominous divergence between small caps and large caps, a large-cap breakout was perhaps "the only hope" for bulls trying to maintain a constructive outlook on this market.

We suspected it a false hope, as shown via time-stamped excerpt from our Live Feed commentary earlier this week:

05/13 Commentary: Not Buying It

8:21 am - May 13, 2014

Markets saw a "risk on" surge on Monday, with risk assets rising across the board. Everything from transports to small caps to steel and coal stocks got lifted. We're not buying it.

We lifted potential long orders for DIA and IYT - and sold off a number of remaining holdings - after digging deeper over the weekend and realizing how unappealing the fundamental internals of this market truly are. Dissonance on the fundamental side increases the odds the breakout is false, or will otherwise turn to slop.

Small caps are broken, the large cap picture is deteriorating beneath the surface (masked by the biggest names), and the noise to signal ratio feels very high. This ain't the time and place to be surging ahead boldly. As such we are cutting back on exposure and do not want to chase.

So much for hope…

As of this writing (Thursday morning intraday), the large-cap breakout for the S&P 500 (NYSEARCA:SPY), Dow Jones Industrial Average ((NYSEARCA:DIA)) and Transport Index (TRAN) has revealed itself to be - as we suspected - a giant head fake (see charts below).

(click to enlarge)

Again, as we asked a few days ago: How do we know the bull market isn't over?

Source: Large-Cap Breakout Failure Is Ominous For Bulls