"This Rarely Ends Well" - Traders Fear Ominous Divergence In S&P 500

Chinese FX markets are turmoiling...

 

And US equity market breadth is collapsing. As one trader noted, this "rarely ends well for stocks."

 

As Bloomberg reports, such divergences, measured by comparing the S&P 500 and the number of constituents trading above their 50-day moving average, have been rare since 1990 -- and are generally bad news for investors. In the seven instances that occurred before this year, all but two portended further losses in the next three months, with the S&P 500 falling a median 1.3 percent, according to data compiled by Sundial Capital Research Inc.

“This recent weakening in breadth is troubling,” Jason Goepfert, president of Minneapolis-based Sundial, wrote in a note to clients. “It rarely ends well for stocks -- usually, the indexes follow breadth as opposed to the other way around.”

 

Before 2015, a divergence like this hadn’t shown up during the rally. The rising frequency highlights the vulnerability of the stock market to potential shocks, according to Yana Barton, a fund manager of Eaton Vance Focused Growth Opportunities Fund in Boston.

 

Coincidentally or not, the other time when two warning signals like this flashed within three months of each other, in December 1999 and February 2000, equities ended up erasing half their value over the next two years.

 

U.S. stocks fell on Thursday, extending their weekly decline to 1 percent, as anxiety over earnings and interest rates sent banks sliding a day before JPMorgan Chase & Co. and Citigroup Inc. deliver their latest earnings reports.

 

“Uncertainty breeds fear. All the things that we’ve been uncertain about, whether it’s political outcome, monetary policy or the earnings recession -- those are the same fear we’ve been dealing with,” Barton said. “When you have a larger participation, it always helps because you have more names that pop up the market so you’re less susceptible to potential declines.”

Of course what reason is there to believe stocks drop here?