The Dow Jones Industrials ($INDU), a proxy for blue chip stocks, closed at a new weekly cycle high (10,318) on Friday, November 20.
The Russell 2000, a proxy for the small-cap sector, posted a weekly close at 585, which was -5.1% below its Friday, October 16, 2009, close at 616.
That's not what we like to see. If blue chips are making new highs and small cap stocks are not, it creates a negative divergence, a non-confirmation that typically signals an end to an intermediate-term rally.
The healthiest stock market rallies occur when all of the major sectors and indices capture new highs in concert. When they don't, it typically signals that stocks will correct and/or begin moving in a sideways range.
And the most profitable and least risky rallies occur when small-cap stocks lead. That's because small-caps are considered the riskiest of the three capitalizations (large-cap, mid-cap and small-cap). And when investors are willing to bid small-cap stocks to new cycle highs, they are confident that the stock market and the economy are healthy enough to support one of the riskiest areas of the stock market.
Other key sectors that DID NOT confirm the weekly new cycle high on Friday include the bank, brokerage, financial and semiconductor stocks.
Until these sectors and the smallcaps post new cycle highs along with the Dow Jones Industrials, the odds are high that the stock market will undergo a correction.
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