Do These Divergences Matter?

JC Parets
June 5, 2021

For me, it's not just about one indicator or one chart.

It's a weight of the evidence game.

Since March, the bet has been Messy For Longer. We've expected a choppy environment. That's what the weight-of-the-evidence and history suggested.

But now what? Are these consolidations going to resolve lower? Or Higher? Or just stay messy for even longer?

That's what makes this all so great. I don't know. And neither do you. No one does.

It's a beautiful thing.

So as I weigh the evidence to decide rollover or breakout, I come to a series of divergences that put this stock market in quite the predicament.

With S&Ps and major indexes hovering near all-time highs, we're just not seeing it from the components themselves. Here's the Russell3000, for instance, seeing fewer and fewer new highs:

You're seeing the same deterioration in credit. As giddy as people are, and they haven't been this giddy since January 2018, you're just not seeing it in bonds.

Look at Junk Bonds underperforming Treasuries up here. This is a classic move for bonds just before stocks come under pressure.

We saw the same thing just before the COVID Crash, which was a big reason we wanted to be shorting stocks in February 2020.

Now how about this guy? Consumer Discretionary stocks making new 52-week lows relative to S&Ps? The strength in Consumer Staples and weakness in Discretionary is another classic move by the Mr. Market just before the stock market comes under pressure:

I'll also be curious as to how this one resolves. The bearish momentum divergences stink of a reversal. Especially since Financials on an absolute basis hit our upside targets last month.

A break below the March highs will confirm that this trend is all she wrote, at least for now.

Remember, these are all tactical implications. Financials just broke out of a 14 year base to new all-time highs. We're in the camp that the trend there is really just getting started. But that doesn't mean bank stocks have to rally this summer. In fact, this evidence above would suggest that they won't.

Here are Regional Banks relative to S&Ps. If you remember, when they broke to new all-time lows in February of 2020, it was another reason to be short stocks at the time.

The ability for Regionals to recover back above those former lows from 2011 would be incredibly constructive. I'm just not sure it happens on this attempt.

I think it does, ultimately. But it's guilty until proven innocent here, as far as I'm concerned.

We'll let Regional Banks make new relative highs and Financials break out to prove that this thesis is probably incorrect.

And I'll be happy to let them prove it wrong. Because I don't particularly care either way. I just want to be on the right side of the trend. And currently it's still a choppy mess.

I've learned to ignore what you think should happen in favor of what actually is happening.

JC

 

Filed Under