The Calm Before The Storm

Intra-Market Divergences Galore 

US big cap stocks have rallied to new highs in recent months, but just as in the rally from the low of the February 2018 mini-panic to the September/October 2018 peak, sizable divergences between different indexes have emerged in the process. New highs in the big cap indexes (DJIA, SPX, NDX) are once again not confirmed by small caps (RUT), the broad market (NYA) and a number of sub-sectors (such as the DJTA which is included in the chart below; according to Dow Theory, the DJTA must confirm moves in the DJIA to validate its trend).

From the top: weekly charts of DJIA, SPX, NDX, RUT, NYA and DJTA. The recent new highs in the three large cap indexes have not been confirmed by small caps and the broad market. Note also the sizable RSI/price divergence in the DJIA (which is mirrored by SPX and NDX) – this is a sign of faltering momentum that is often seen ahead of trend changes.

We last discussed a “lengthy non-confirmation” in mid-September 2018 (see “US Equities – Approaching an Inflection Point”). Everything we said about the phenomenon at the time applies to the current case as well. In fact, it could well be argued that the current spate of non-confirmations is even more ominous as they are stretching over a time period of approximately 18 months by now (the broad market represented by the NYSE Index has yet to overcome its January 2018 peak).

US big caps are diverging from European and Japanese stocks as well, which have failed to reach new highs in the recent rally. It is also noteworthy that stocks and junk bonds have studiously ignored weakening macro-economic data in recent months – the rationale is apparently that an impending easing of monetary policy by Fed and ECB is more important than the economy’s poor performance and the prospect of lackluster earnings. The idea seems to be that a resumption of monetary pumping will immediately arrest and reverse recent economic trends, which is quite a leap of faith.

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Gary Anderson 8 months ago Contributor's comment

Sobering assessment of history.

Carl Schwartz 8 months ago Member's comment

Yes, Gary Anderson, you are right.