With stocks hitting new all-time highs and the dollar surging, there is trouble brewing below the surface.
Too many S&P 500 stocks are lagging
From Jason Goepfert at SentimenTrader: “There have been numerous oddities in markets in recent days. One thing that has not been odd is market breadth. Gains in recent days have been broad-based, leading to an exceptional number of 52-week highs on Wednesday. And Thursday. That’s what makes what we’re about to look at so unusual…
Among S&P 500 stocks, fewer than 70% of them are trading above their 50-day average, and also fewer than 70% are above their 200-day average. That’s an awfully small number given that the S&P index itself has been busy closing at all-time highs.
The last time this happened was in mid-May 2015.
Comparisons To The Year 2000
We took a look at a similar divergence in the Nasdaq last November, which followed through with the typical pattern of weakness when the divergence was so stark. What’s notable about the current divergence in the S&P is that it didn’t just happen on Wednesday. Over the past three weeks, there have been 5 such days, the most since the year 2000.
On the next page, we show how many days showed similar divergences over a three-week period. For these purposes, “divergence” is defined as a day when the S&P 500 closed at a three-year high, but fewer than 75% of S&P 500 component stocks were trading above their 50-day and 200-day averages at the time.
Even at the peaks in 2007 and 2015, there were fewer divergences than we’re seeing now. We can see from the chart … that stocks had great difficulty maintaining its upside momentum where there were such persistent divergences underlying the index.
The worst performance was over the next 2-4 weeks. None of them really showed an ability to shrug off the divergences and head higher uninterrupted. The S&P showed a positive return three months later all but one time, though the 1999 instances were leading into the 2000 market peak. We’d consider this to be a moderately important warning sign for the current market (see troubling Nasdaq comparison chart below with the most comparisons since 2000, right before the stock market crashed).
The charts and commentary above are from SentimenTrader. To try a free 14-day trial of the internationally acclaimed work that Jason Goepfert produces at SentimenTrader simply CLICK HERE.
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