As stocks press back towards all-time highs amid a US government shutdown, extreme weakness in earnings pre-announcements, slower-than-expected China growth, Europe's recovery in doubt, and a looming debt-ceiling debate in the US, we look at four 'big picture' charts of dismal divergences that suggest it's not different this time at all...
There is a negative divergence in New 52-Week Highs...
Triple bearish divergence on the % of NYSE stocks above 200-day MAs
Below 60% on the % of NYSE stocks above 200-day MAs would provide a warning for US equities
The % of NYSE stocks above their 200-day moving averages has a strong bearish divergence similar to the divergences that preceded pullbacks in mid 2010 and mid to late 2011. This points to diminishing momentum for market breadth and preceded pullbacks in the range of 15%-20% in 2010 and 2011.
Both daily and weekly MACD and RSI suggested weaker price momentum as the S&P 500 moved to new highs above 1700 in early August and mid September. This is corroborating the bearish divergence on the percentage of NYSE stocks above 200-day moving averages. The last time both weekly and daily momentum had bearish divergences was in mid 2011. In 2011 the S&P 500 corrected nearly 20% from an April peak to an October low.
Potential triple bearish divergences for weekly MACD & RSI. The S&P 500 has three higher highs, while weekly MACD and RSI remain in downtrends off those S&P 500 highs – this is a potential triple bearish divergence. Weekly MACD has not yet reversed its sell signal.
Margin Debt still contrarian bearish
Using closing basis monthly data, peaks in NYSE margin debt preceded peaks in the S&P 500 in 2007 and 2000. The March 2000 peak in NYSE margin debt of $278.5m preceded the August 2000 monthly closing price peak in the S&P 500 at 1517.68. The July 2007 margin debt peak of $381.4m preceded the October 2007 monthly closing price peak of 1549.38 for the S&P 500. Margin debt reached a record high of $384.4m in April and the S&P 500 continued to rally into July, August, and September. This is a similar set up to 2007 and 2000.
Bonus Chart - Margin debt: the long-term overlay
Going back to January 1959, margin debt and the S&P 500 have moved together for the most part. But leverage is a double edge sword and can exacerbate sell-offs, leading to deeper than expected market pullbacks.
Still think the "market" is driven by earnings or fundamentals? or just leverage and marginal credit expansion (shadow banking repo... etc.)?