The Principle of Relative Strength.  Just checked some on where this rally now stands applying one of my principles.  One sound fundamental to practice for near and intermediate term performance is to favor those stocks and sectors doing well and then shy away from those sectors underperforming.  In fact, that’s part and parcel of Investor’s Business Daily (IBD) approach and many other investor’s thinking as well.  So below are some relative strength comparisons and observations.

• The Dow Transports is far outperforming both the Dow Utilities (2^nd in the pecking order) and Dow Industrials (3^rd).  In fact, the Dow Transports is quickly closing in on its old July 17^th, 2008 high of 5487.05 (closing yesterday at 5368.15), getting close now to retracing 100% of its losses.  While the Dow Utilities has retraced upwards just past its 61.8% Fibonacci retracement level of 519.41 (closing at 523.27 last Friday) before dipping to close at 514.95 yesterday.  The Dow Industrials is bringing up the rear, because its 30 components includes some troubled financials like Bank of America, Citigroup, etc. and has thus just passed the 50% retracement level with its 61.8% Fibonacci number next in line at 13,218.93 (the Dow closed yesterday at 13,020.83.  Schwartz View:  Still, when a retracement reaches 50%, it meets the 50% Rule or teeter-totter test, generally having the impetus to bring it all the way back up.  On the other hand the born-in-nature Fibonacci price levels are numbers many traders watch closely for turning points.
• The S&P 400 Midcap is distinctly outperforming the S&P 600 Smallcap.  The midcap index has rallied back and just touched it’s 61.8% Fibonacci retracement level of 852.08 but the smallcap index hasn’t even retraced 50% of its last nine month decline.  Schwartz View:  The NYSE advance/decline line, which includes large cap, midcap and smallcap stocks, remains below its peak of last year.  Since the A/D line has a natural tendency to rise it’s a negative sign that it remains pointed down.  In fact, that’s one time proven indication of big trouble ahead for the exchanges as the A/D line generally leads the key indices down with some time lag.  If things remain status quo, when I go back to shorting the market, the smallcap index is a prime choice.
• The Nasdaq 100 is outperforming the Nasdaq Composite, but not by much.  The Nasdaq 100 has retraced slightly more than 50% of its decline but the Nasdaq Composite hasn’t.  Schwartz View:  I’d say this slight outperformance by the 100 is because it doesn’t have any financials in it.
• The S&P 100 is about tied with the S&P 500 (the pro’s benchmark index) both retracing just about 50% of their declines.  Schwartz View:  Makes sense since the 100 and 500 both have a lot of big banks in them.  Either may be a good choice to short when the time is right again.

Schwartz  Summing Up.  Ok, summing up, I’d say all the indices with weightings in financials are the ones to short, using ETF’s or inverse sector funds, when this rally ends.  And the financials are likely one big KEY to when this rally ends.  When they top out.  Now things can change, but right now, applying my Principle of Relative Strength, which essentially tells us to (almost) always favor strong relative strength, the transports is the sector to back and the financials is the sector to stay away from.