🔔 The Role of Divergence

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Over to The Veteran today.

For a while everything was in Up Only 🚀 mode. Now things are starting to shift under the surface of the indices... 👇

Divergence is a theme that underlies the current market whether we realise it or not.

We can see divergence in charts such as this one 👇

The chart plots the percentage of stocks in the S&P 500 that are above their 20-day moving averages (the black line) against the S&P index in blue. The red line is the 50 day moving average of the percentage line.

Now let’s look at this chart which uses the Invesco S&P 500 Equal Weight S&P (in green) instead of the Cap- Weighted S&P 500 index 👇

Notice the difference?

In the second chart, we can see that the equal-weighted RSP ETF (a proxy for the Equal Weight S&P 500) has fallen farther / faster than the Cap-Weighted index in the chart above.

Here is the S&P 500 Index in blue versus the equally weighted S&P 500 ETF RSP in black.

For context this shows the relative under and over-performance of cap weight and equal weight versions of the index

These two charts shine a light on the divergence that until recently has been propping the market up: The performance of the large or mega-cap stocks versus the broader market.

We can infer what’s been happening in these two groups from the chart above which shows the % of stocks within the S&P 500 that are in a bull trend in blue versus the S&P 500 itself in green.

Less than 45% (225) of stocks in the S&P 500 are still in a bull trend.

We can examine the relationship between these two groups by using Apple as a proxy for mega-caps and then comparing its performance to the equal weight S&P 500 ETF RSP in red...

Apple of course is the largest company in the world by market cap and is shown here in black with the equal weight ETF in red. The chart is a percentage performance plot over the last 6-months and the differential between the two speaks for itself.

How about this chart of the net number of new YTD highs and lows (one minus the other) on the Nasdaq exchange, shown in dark purple, versus the Nasdaq 100 and Nasdaq Composite indices.

We are seeing new lows outpacing highs and that net figure line is descending far quicker than the equity indices, which track the stocks making the new Year To Date lows.

The average Nasdaq 100 stock has made 10.3 new 52 week lows as of Friday’s close, and interestingly enough there aren’t ANY stocks in the tech benchmark that haven’t posted a new 52 week low this year...

Read into that what you will.

These charts are not a reason to be selling out of equities on their own but they are call to action to think about what (types of) stocks you want to own and what stocks you don't want to.

They should make all of us think about whether we want to chase this market higher as, when, and if, the Omicron uncertainty is resolved and we get back to focusing on the Fed and interest rates and timing of their first (inevitable?) hike.

US CPI this Friday. FOMC next Wednesday...

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