Can Stocks Keep Pushing Higher? Divergence Is a Threat

Stocks seem to have continued their winning ways last week. Or did they?

Major averages turned in varied results. The Russell 2000 barely managed a 0.2% gain while, on the other end, the S&P 500 gained 1.5%. The first couple of days of the week stocks meandered. Wednesday saw a big jump. Thursday saw some consolidation and Friday was a definite down day.

Earnings reports were decent but investor reactions were mixed. The market applauded Google (GOOG) and JP Morgan Chase (JPM) but gave Goldman Sachs (GS), Citi (C) and Bank of America (BAC) the raspberry.

Economic reports were also decent with retail sales beating expectations, initial jobless claims less than expectations and the Empire State Manufacturing Index coming in at a level almost twice the consensus.

Where do we go from here? We'll look at some of the charts that follow and see if we can figure that out.


Charts of some of the statistics we track at Alert HQ are presented below:


This first chart tracks our moving average analysis. What jumps out at me here is that SPY, the SPDR S&P 500 ETF, is moving to new highs while the number of stocks above their 50-DMA (the yellow line) has not. A further worrisome factor is that the number of stocks above their 50-DMA has failed to cross above the number of stocks whose 20-DMA is above the 50-DMA.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.


Here we see a similar pattern. While SPY hits new highs, the number of stocks in strong up-trends just can't seem to get going. Fortunately, the number of stocks in strong down-trends is also knocking around at a reasonably low level.

Conclusion

It's all about the divergence this week. Major averages hit new highs this week but our statistics tell us that we are starting to see fewer stocks participating. This is seldom a recipe for a strong run to new sustainable highs.

This leaves investors dependent on some kind of strong catalyst that could turn things around. With tons of earnings on tap, good results from a few bellwethers might do the trick. Economic reports this week don't seem sufficiently important to offset the parade of earnings.

So hope for the best as those earnings reports come through. We'll need them to turn divergence into convergence.

Comments

[Mad Hedge F...:]

chi When everything is working, and my portfolio is firing on all 12 cylinders, I pinch myself and ask “Is this real? What can go wrong?” I’m reminded of the slave whose task it was to remind conquering Roman generals “All glory is fleeting.” Virtually all of my recommended core longs in gold, silver, Canadian, New Zealand, and Australian dollars, Brazil, Russia, India, South Korea, Taiwan, Vietnam, and junk bonds are at or near highs for the year. I called the bottom in Natural Gas within 40 cents, and mercifully baled on my one short in US government bonds, the TBT. What we are seeing is a global surge in liquidity as cash emerges from the bomb shelter, squints at the day light, and then rushes to buy the first thing it can find. Everything is going up, regardless of fundamentals. It is the proverbial tide that is lifting all boats. You can make a lot of money in these conditions, but there is no way of knowing if this will last for one week, or another year. But they can go on much longer than you think. In the last two liquidity driven markets I traded, Japan in the eighties and NASDAQ in the nineties, fundamental analysts railed against the tide for years, claiming that stocks were overvalued, each call getting their office moved ever closer to the elevator and men’s bathroom. When someone finally did throw the switch on these markets, it got dark amazingly fast. Tokyo went out at an all time high on the last day of 1989, and then dropped a staggering 45% in January. NASDAQ plunged just as fast from its 2000 top. The one thing we can all be certain about is that the survivors have vastly improved their risk control after our recent crash. Make hay while the sun shines, but keep your finger hovering over that mouse. The level of risk is definitely high than it was in March. When the next real downturn starts, it could resemble a flash fire in a movie theater.

Oct 19 11:25 AM