07/26/14 . . .  by Bob Karrow


  • My charts were completely revamped during June 2014 and minor alteration are always underway.  If you haven’t seen them recently, make sure and take a look.  My charts consist of all the items that Paul Desmond warned about in his paper, “THE WARNING SIGNS OF MAJOR MARKET TOPS”, which you can find at the following link


  • If you aren’t familiar with my unorthodox wave counting method, there is a simple explanation at the beginning of the glossary. The glossary also contains lots of other details (explanations) that don’t appear in the blog.



  • A lot of visitors to my blog are looking for information on T-Theory ®.  The below link will take you to the index of all of Terry’s comments during the period Dec 2003 to June 2011.  There are a considerable amount of charts and audio material from Terry Laundry in this section.
  • If you are looking for the ability to make your own predictions using T-THEORY ®, I would highly recommend Terry’s Encyclopedia on T-THEORY ®


  • John Murphy is becoming concerned over the growing disparity between the small caps and the large caps stocks.  His comments below are a warning that everyone should be aware of this cautionary sign.  
  • Although the U.S. stock market has shown impressive resilience over the past few months, there are some troubling signs beneath the surface. One is the negative divergence between small caps and large caps. Since March 5, the S&P 500 Large Cap Index has gained more than 5%, while the Russell 2000 Small Cap Index has lost an equal amount. That negative 10% divergence is the biggest since 2011. The red line in Chart 1 plots a “ratio” of the Russell 2000divided by the S&P 500. The black line is the S&P 500 by itself. Generally speaking, market rallies since 2009 have been led by small caps (a rising ratio). We saw that between 2009 and 2011, and again during 2012 and 2013. Chart 1 reveals at least two things. One is that the 2014 peak in the small cap/large cap ratio peaked around the same level as the 2011 peak. Second, that the ratio has fallen the most since 2011. Between May and October of that year, the S&P 500 fell 19% versus a 29% loss by the Russell 2000 (matching this year’s divergence). Chart 2 shows the Russell 2000 trading in the middle of its 2014 trading range, and testing its 200-day moving average. As I suggested last Saturday, it may take a drop below its May low to signal more trouble for the broader market. That negative divergence, however, remains a caution sign.

Chart 1

Chart 2

 JUNK BONDS ALSO DIVERGE FROM STOCKS … Another caution sign is coming from the bond market. Treasury bond prices hit a new 52-week high in a flight to safety, possibly from growing overseas tensions (more on that later). High yield government bonds (junk bonds), however, have had a bad July. The daily bars in Chart 3 show the iBoxx High Yield Corporate Bond iShares (HYG) falling during the first half of the month on rising volume. This week’s bounce was turned back at its (blue) 50-day average, which is now acting as a resistance barrier (blue arrow). Junk bonds are the riskiest part of the fixed income space and are the most closely tied to the stock market. That July divergence between high yield bonds and the S&P 500 (black line) is another troubling divergence. That’s because the two markets are highly correlated. Chart 4 show the two markets rising together over the last five years. The 50-week Correlation Coefficent (below chart) shows a positive correlation of .96 between the two. During 2011, both experienced large downside corrections. They’ve risen together since then — until this month. That bears watching.

Chart 3

Chart 4


  • Click on any chart to enlarge it
  • ES is SP 500 futures
  • YM is DJ Industrial futures
  • NQ is NASDAQ Composite futures
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Explore posts in the same categories: UPDATE, WISDOM

2 Comments on “John Murphy Says SMALL CAP DIVERGENCE IS TROUBLING”

  1. Bob Says:

    Glad I could help.

    Watch for more Edson Gould articles to follow on my blog. Terry was a big fan of Gould in his later years. Too bad I never published my collection of papers while Terry was alive. Hindsight is always 20-20.



  2. wherchat Says:

    Bob,  I was a Terry Laundry client and really appreciate your archive of information  Thank you organizing and for making it public.  Regards, K



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