SPY Hits 3-Sigma Divergence From VWAP
All those who have had a fishy feeling about this whole volumeless rally may be curious to take a look at the following graphic which indicates that unprecedented divergence between the VWAP on the SPY, which since the beginning of the rally in March has hit just over 91, and the actual SPY which as of last night was at 107. The difference between the two data series is now roughly 15 points, or about 150 on the S&P, or just under 1,500 DJIA points. This differential is entirely due to the low volume aggregation on the way up, in essence the entire run up has been a lite version of a 6 months long gap move up. What the chart also explains is the propensity by the market to see every potential sell off have a dramatically broader volume participation than the computer driven trickle higher, as all market participants realize there is insufficient accumulation interest to justify this 3 Sigma divergence.
Of note on the chart are the red boxes which represent the lateral move in the pure SPY needed to generate a 5 point move in the VWAP. As the width of the boxes increases it demonstrates, once again, that with time the rally has been of lower and lower quality (i.e., volume), meaning a much greater move in the actual index is needed to move a volume weighted representation. All this merely highlights that if and when sentiment turns, the whiplash will be dramatic as programs are reversed and instead of diverging from VWAP they start chasing VWAP. And, as expected, a synthetic and algo driven 150 pts move in the S&P should be sufficient to start a negative feedback loop of people running for the exits.