A Tale of Two Markets: Negative Divergences Appear

By Lawrence G. McMillan

There were seemingly two stock markets yesterday.  By that I mean that the big-cap stocks that have led this rally continued to do their thing, driving $SPX and the other major indices to new all-time highs.  But there is a lurking problem that is perhaps coming to light: breadth was negative yesterday!  I can’t recall $SPX being up 8 points, yet both “stocks only” and NYSE-based breadth being negative, but that’s what happened yesterday.  Also, averages that include small-cap stocks are beginning to struggle.  Arguably, the most well-known of these is the Russell 2000 ($RUT or IWM).  That index actually broke down yesterday, leaving behind what looks like a heavy resistance area at best and possibly an outright top.

So what does this mean?  This market has a “who cares?” attitude about most things like this.  In the traditional sense, it is negative when divergences such as these begin to appear.  But people are chasing yield in drugs and familiar consumer names, and they may not care.  What I like about this analysis is that no one is talking about it.  I haven’t heard one comment on TV that $RUT is breaking down (OK, maybe one), nor that breadth was negative in a seemingly runaway bull market yesterday.

As a result of the negative breadth, the breadth oscillators remain on sell signals, but they are alone.  Equity-only put-call ratios continue to decline, and thus remain bullish (I guess the “protection buyers” have given up on buying puts, figuring that’s just a waste of money – exactly what we need to get a good sell signal in the coming days or weeks).  

Volatility indices ($VIX and $VXO) dropped sharply yesterday, and thus they remain bullish as well. $VIX would have to close above 14 at a minimum in order for us to grade it anything but bullish.

In summary, this market continues to roll along.  Perhaps these divergences are significant, but we would only venture to sell $SPX if it broke down below support levels, which is seems to have no intention of doing.

This market comment was taken from this morning's edition of The Daily Strategist Newsletter.