Blue Chips Should Continue to Outperform
05/01/2007
On Wednesday, I posted the following chart (please see below for our subscribers). I have maintained a spread position long the Dow Blue Chips (DIA) vs. short the Small Cap Russell (IWM) since September 2006. I argued then, and still contend now, that money flows, uneven global economic growth prospects, and the impact of a weaker dollar SHOULD combine to make the BIG CAP -- GLOBALLY POSITIONED -- BLUE CHIPS more attractive than small cap localized businesses.
My sense is that all of the action since July 2005 represents a big base pattern that that ended the prior multi-year deterioration of the BIG CAPS vs. the small caps, and the beginning of BIG CAP appreciation (outperformance) vis-a-vis the small caps. From a technical perspective, the spread has to widen beyond a ratio of 1.6400 to trigger a relative BIG CAP upside breakout versus the small caps.
Since Wednesday the spread has widened from 1.5792 to 1.5870. The powerful upside breakout in BIG CAP DJIA component GE yesterday and today bodes very well for continuation of BIG CAP outperfomance in the upcoming days and weeks.
Mike Paulenoff is author of the MPTrader.com (www.mptrader.com), a real-time diary of his technical analysis on equity markets, futures, metals, currencies and Treasuries.
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