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Small investors are skeptical while insiders are bullish.

Divergent sentiment explains recent cross-currents but is encouraging.

Eventually the smart money will prove to be correct.

The large cap indices including the Dow Jones Industrial Average (DJIA) are struggling while NASDAQ stocks are outperforming. This divergence can be partly explained by a similar divergence in the psychological profile of retail versus institutional investors. In this commentary well examine both sides of this split market environment as I make the case that the NYSE should eventually follow the tech sectors leadership.

The NASDAQ Composite Index is up 8% so far this year, but youd hardly know it by the way retail investors have been acting. According to the latest American Association of Individual Investors (AAII) survey, just 26% of its members are bullish, which is well under the long-run average. Meanwhile investor neutrality is also above the norm at 45%. The lack of enthusiasm stems from a number of factors, including concerns about stock valuations, rising interest rates, and lingering concerns about the Trump administrations plans regarding trade policy.

In contrast to the lack of bullishness among individual investors, Its worth mentioning that the Thomson Reuters Insider Transactions indicator (courtesy ofBarronsby way of Thomson Reuters) dipped into bullish territory on Mar. 9. This marks the first time in several weeks that insider transactions have been this bullish.

While insiders and institutional investors have been mostly positive on the markets intermediate-term prospects, theres no denying that small investors are still tepid about dipping their toes into the stock market waters. This is probably an after-effect from the 10% market correction last month, but also from ongoing fears over what impact rising interest rates might have on the economy in the months ahead.

Another possible reason for the current lack of enthusiasm among small investors is the action of the large cap stocks as reflected in the Dow Jones Industrial Average (DJIA). The short-term Dow graph summarizes the condition of many large cap stocks (below). While the large cap indices have failed to keep up with the NASDAQ in making decisive new highs in recent weeks, the Dow, S&P 500, and NYSE Composite averages have all lagged behind and are having trouble gaining traction as was made apparent on Wednesday. These indices are also having trouble staying above the 15-day moving average, having slipped below it again Wednesday.

Regardless of the reasons, widespread participation in the February-March NASDAQ rally has been lacking. A lack of enthusiasm among retail investors is a double-edged sword, however. On the one hand it lends itself to the wall of worry which every bull market feeds on. On the other, a truly dynamic bull market of the runaway type requires widespread participation from the crowd to generate the type of momentum needed. If history is any guide, the publics cautious attitude toward equities will slowly change as we head further into the year. Sooner or later, rising prices in the speculative tech sector always attracts a big following among smaller participants.

Meanwhile, the NYSE tape was unsettled as of Wednesday. The most important gauge of the stock markets internal health is the 52-week new highs and lows, which measure the incremental demand for equities. There were 85 stocks making new 52-week lows on the NYSE for Wednesday versus only 51 new highs. This negative high-low differential showed that internal selling pressure hasnt yet disappeared from the Big Board and that more consolidation is needed to completely work off the remaining weakness before the NYSE stocks are ready to run again.

The cumulative new highs-new lows line for the NYSE stocks is shown here. As you can see, it stands in need of improvement before the Big Board stocks catch up with the NASDAQ. It also explains the head cold the Dow caught this week.

Another indication of the widespread lack of faith in the equity bull market can be seen in the recent action of the bond market. Treasury bonds have seen an uptick in buying activity in recent days in what could be described as safety-related interest. Below is the chart of the iShares 20+ Year Treasury Bond ETF (TLT), an excellent proxy for T-bond prices. As can be seen here, TLT broke out from a 4-week consolidation pattern on Wednesday with Treasury prices rallying by 1% intraday.

The developing immediate-term trend toward safety can also be seen in the Dow Jones Utility Average (DJUA), which has been inching higher in recent days. Nothing underscores investor cautiousness better than a rally in utility stocks. More importantly, once the DJUA closes above 699.73 it will have risen 8 percent from its Feb. bottom, which will complete a Fabian Formula bottoming pattern (seeMar. 14 reportfor details) and should be followed by a meaningful advance in all three averages with the Dow Industrials presumably leading the charge.

A healthy measure of caution is definitely in order right now given the potential threat to the large cap indices posed by the still-high number of NYSE stocks making new 52-week lows. That said, I recommend that we continue to give the bull market the benefit of the doubt during this latest bout of internal weakness on the Big Board. Investors should also maintain a bias toward the relative strength of the outperforming NASDAQ stocks and ETFs. I continue to recommend the ETFMG Prime Cyber Security ETF (HACK) as one way of participating in this strength. Im using the 33.72 level as the recommended stop loss on this trading position. Im also currently long the First Trust Dorsey Wright Focus 5 ETF (FV), which encompasses the five top-performing market segments, including banks, Internet stocks, industrials, and producer durables. I recommend using the 28.30 level as the initial stop loss for this ETF.

Meanwhile, conservative investors should continue to wait for additional improvement in the NYSE new 52-week highs-lows before establishing major new long positions among NYSE-listed stocks. Long-term investors can maintain their core long-term positions since the markets fundamental position and dominant longer-term trend both remain positive.

Disclosure:I am/we are long HACK, FV.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.