A Behind-the-Scenes Selloff?

New highs are in for the Dow again. Ditto the S&P.

But under the surface, the market’s not looking so spectacular.

The Russell 2000 cracked this week. It tried to get up yesterday, but small-caps couldn’t hold their ground. Transports followed. The Dow Jones Transportation Average dropped more than 1.2% Tuesday. Both the transports and the Russell registered slightly lower highs to kick off the second quarter…

Russell 2000 Small Cap Index vs. Dow Jones Transportation Average

Commodities are tanking, too. Gold, silver, platinum, copper — all are lower this week.

Of course, some pundits have been quick to defend yet another sharp selloff in precious metals. It’s only “technical selling pressure” they say, as if the move lower doesn’t apply to any fundamentally-minded investors. Perhaps long-term holders should receive a special voucher to give to their brokers entitling them to higher prices? Something to consider…

In truth, selling is selling. No matter how you slice it, the effects are the same.

With all the selling in small-caps, transports, and metals, it’s clear that the second quarter is already working its voodoo. The market feels heavy. I’m seeing more failed breakouts during my daily rounds. Big, safe names are propping up the market. But how long can they hold everything else together?

To be clear: it’s not time to fly your crash flag. There’s no guarantee that a major selloff will rock the markets this month. After weathering the Cyprus scare, anything bigger than an orderly pullback would surprise me at this point. But I wouldn’t be surprised if stocks leaked steadily lower. While everyone is watching new highs in the major indexes, the market’s undercurrents are hard at work, plotting to take their money…

For now, your strategy should remain the same. Don’t chase momentum. Stick with your large-cap names until they show signs of weakness. Stay vigilant.

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning