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Are the Generals Leading the Way? Or Abandoning the Fray?



Does General Electric (GE) matter anymore to the stock market? What about Citigroup (C)? Surely everyone would agree that ExxonMobil (XOM) is important, right? Together, those three stocks account for nearly 9% of the S&P 500, so it's an important question to answer; GE and C alone account for more than 5%.

I have read where some analysts are suggesting that all is well in the S&P 500 and that some of us are placing too much importance on the generals; they have left the field of battle while the troops remain in the trenches fighting the good fight.

Wouldn't it be cool if we could see if this really is the case? Let's give it a shot.

The chart of General Electric remains very scary looking in my opinion.

General Electric Company (GE)

GE violated the trendline from the 2003 lows in August of this year and has since then formed a range just below new trendline resistance while remaining on a sell signal. The present downside count is to 30.50 and a move below 33 will break a spread triple bottom.

GE, of course, holds the highest weighting in the S&P 500 at 3.31%. ExxonMobil (XOM) is second, with a weighting of 3.26%, and Citigroup (C) third at 2.18%. So, as a technician, it's a bit troubling to me that all three of these stocks have violated trendline support dating back to the 2003 lows.

But wait, Kevin, so what? Maybe it's the other 497 stocks that are ready to support the SPX and take us to new highs? Yes, maybe, but doubtful. I'll settle for the top 100 stocks in the S&P 500 since they account for a weighting of 65.5% of that index.

Presently, the biggest concern I have is that the percent of stocks on the S&P 500 that are on point and figure buy signals is declining, meaning supply is in control, and currently at 48%. The percent of stocks on the S&P 100 (the 100 largest stocks in the S&P 500) that are on point and figure buy signals is declining and currently at 54%. Both of these indicators have given sell signals, breaking down below their April lows.

Percent of SPX stocks on point and figure buy signals

Meanwhile the SPX and OEX indices have both held above their April lows... so far... though the OEX is very close to breaking below it and will do so with a move to 540.

I view this as a negative divergence. The reason I believe it is negative is that the percent of stocks on the SPX and OEX on point and figure buy signals peaked in January 2004 for the SPX and September 2003 for the OEX (another negative divergence given the weighting of the top 100 stocks in the SPX, more than 65%) even while these indices moved to new mutli-year highs.

You cannot have it both ways. If the generals (those stocks with the highest weighting) are the most important stocks in the SPX, then their deterioration is a warning sign. If, as some say, the generals are now less important because the average stock is responsible for dragging the SPX kicking and screaming to new multi-year highs, then we should not be seeing a multi-year deterioration in the percent of stocks on point and figure buy signals for both of these indicators.

A key thing to remember here is that this process of technical deterioration within the indicators for the SPX and OEX has occurred over a period of two years now. But make no mistake, while the deferred effects of that deterioration have yet to be felt, it does not mean they will never be felt. I remain convinced that risk is extraordinarily high at this point in time.

Of course we can always arrive at a point where this risk becomes more muted... and I'll leave the how's and why's for that to someone smarter than me. But until these indicators change, the probabilities in my opinion are that there is far more downside potential than upside potential.

All charts courtesy Dorsey Wright.

No positions in stocks mentioned.

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