Another week rolls by with new highs for the major US indexes and a breakdown for many commodities. Technically the more interesting question is what is non confirming the new sp500 and Dow highs ? Where are the divergences and what is wrong with this picture of health?
Before we get to the Swiss team’s (and others most recent reports) here some technical charts.
Firstly the Nasdaq100. For what ever reason the tech sector produces extreme momentum moves that we don’t seem to see in any other sectors of the market.
Its a rare market event where you see a major sector of the equity market achieve a +5 (or actually +5.5 STD) of stocks reaching 52wk highs. The same level of STD showed on stocks over RSI of 70 within the nasdaq100. On the short term it looked exhaustive at the least. Its worth recalling that whilst most market indexes distribute towards the end of their cyclical trends they don’t always. Occasionally new market highs, especially on extreme momentum and price movement can mark the end of a cyclical trend when breadth is extremely high. Eg nasdaq yr 2000, the nikkei225 1989 and the ftse100 1987. In all of these cases sharp falls of 30% or more occurred without a protracted distribution phase and where breadth was at very high std.
Here the Nik225. Every stock in the nik225 index was performing and making new 52 wk highs. This didn’t create the scenario for a distributive top. In stead it created a highly risky index that was ripe for a rapid reversal.
Here a couple of reports to explore this theme of market tops. One a retrospective and one technical report written just pre the 2008 collapse.
Back to the current market. The extremely positive breadth we see in the nasdaq100 index is not seen at all in the small cap sp600 index and neither do we see these high breadth readings in the wider nyse index. Instead the sp600 and nyse show divergence in breadth from price. This is a market for large caps & tech (inc biotech) it seems. (Credit markets, especially at the risky end ie junk appears to have topped out).
Sp600 here.
Here the wider nyse:
Clearly there is a divergence between indexes here and when divergences occur like this it usually implies a risk of a step change in volatility. And feeding into macro theory this all makes sense as if indexes are diverging technically it implies the economic recovery is being experienced very differently across sectors. The strongest and most sustainable economic recoveries are usually broadly experienced therefore a more narrow recovery is prone to sharp reversals/volatility. As historic volatility is low at present on the major US indexes there should rightly be a concern that participants are not currently pricing in the risk to their books.
I have to update this report tomorrow but as i know participants are waiting for this report, here the Swiss team’s latest:
All the best
Rich