As we roll into the final days of the third quarter, I’m presented with another opportunity to indulge my love of alliteration. The deepening divergences are firmly on the radar of Doomsday Dan, as you can imagine.
S&P 500 and NASDAQ 100
The major averages remain within striking distance of all-time highs and, to be fair, that is not bearish. As of right now, the divergences we have been highlighting have caused little, if any, damage to the major price trends.
Source: Optuma
S&P 500 Equal Weight Index
If we zoom in on the daily chart of the S&P 500 Equal Weight Index, we see a very different picture. The equal-weight version treats all stocks the same. It is essentially a measure of what the average stock in the S&P 500 is doing, and it is not pretty.
The index has broken decisively below its 50-day moving average, and that moving average is now declining.
Source: Optuma
NYSE Breadth
In a repeat of a chart we highlighted last week, we can see that both the NYSE Advance/Decline Line and NYSE New Lows deteriorated further despite the S&P 500 moving higher.
In other words, the divergence is deepening.
Source: Optuma
The Mag Seven
What appears to be happening is that the entire market is being propped up by the Mag Seven. The Roundhill Magnificent Seven ETF (MAGS) is trading near record levels and has more than recovered its March swoon.
That is great if you own those stocks. It is less encouraging if you are looking for broad market participation.
Source: Optuma
Final Thoughts
There is an old saying on the street that goes something along the lines of “markets are strongest when they are broad.” This is a nod to the importance of breadth, which is a key component of our work. Right now, it is hard to make the case that the market is strong with the divergences deepening.
Now, this could all resolve itself with a breadth expansion, but for now our risk management antennae are up.
