[Chart Of The Week] Stocks Are in a Downtrend

JC Parets
July 5, 2016

If you're one of those people who blindly looks at the S&P500 and thinks stocks are in an uptrend, you can stop reading now and carry on with your rainbows and butterflies. In the real world, the one we live in, stocks have been falling hard for well over a year. Put down your large-cap weighted U.S. indexes for a hot second, and take a look at what's going on.

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[hide_from visible_to="member"]In Europe, kind of an important continent, the Euro Stoxx 50 is down 27% since last April, and close to making new lows again. In Germany, again, kind of important, the DAX is down over 23% since April. Meanwhile, Deutsche Bank, yes important, continues to crash and hits a new all-time low every day (except weekends).

Moving over to Japan, they have stocks there too, the Nikkei is down 25% since August. Not an uptrend.

China? Shanghai down a cool 42% since June.

I can do this all day, but I think you get the point. I don't care that the S&P500 and its mega-cap U.S. weighting is near all-time highs. It's 1 index in 1 country and should be treated as nothing more.

My favorite bearish chart is the one I want to share today. We are looking at the S&P500 Equally-weighed index vs the S&P500 Cap-weighted index. Think of the equal-weight index as the senate (every state equally represented) and the traditional S&P500 as the House (bigger states gets more reps).

Here we can see this ratio breaking down below key support from the past few years and now successfully retesting it. Notice how momentum remains in a bearish range, hitting oversold conditions on sell-offs and refusing to get overbought during rallies. This is standard bearish characteristic:

spx vs spew

Stocks are not at all-time highs. Stocks have been falling for over a year and I see no evidence that we are due for a major turn. To the contrary, we are just seeing more evidence that things should continue lower. I think this charts is one example, but a good one.

The S&P500 is close to all-time highs. Stocks, however, remain in a downtrend.

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