Thursday, May 16, 2013
Back in the days when stocks used to go down as well as up, traders would look for and pay attention to "divergences" in the market.
Divergences occur when things that normally run together start going in opposite directions. They're early warning signs that signal a trend may be ending. And being able to spot them has always been a necessary skill for anyone trying to make a few bucks as a trader.
But nowadays, with the stock market only moving in one direction, most investors believe spotting divergences has become more amusing than useful. Like darning socks or shoeing horses, folks just don't seem to have much need for it anymore.
But even in this period of perpetually rising stock prices, old-timers like me are still watching for divergences. That way, when the market does finally fall – and it will fall – we can wag a finger at the youngsters and say, "Some things never change."
Here are some of the notable divergences that stand out today...
First of all, take a look at this two-month chart of the S&P 500...
The index is up 7% in two months. Over the past three weeks, we've seen a near vertical run higher with only a couple minor down days.
But unlike the S&P 500, copper is down 7% in the past two months. This divergence is notable since stocks and copper almost always run in the same direction.
The Volatility Index (the "VIX") is also showing some divergence... but in a slightly different way...
The VIX usually falls as stocks move higher. But over the past two months – as stocks have rallied – the VIX has gained 10%.
As I mentioned on Tuesday, volatility is at historically low levels. But with stocks trading at new all-time highs, we would expect the VIX to be hitting new lows for the year.
It's not – which is at least a curious divergence.
Finally, here's a divergence for the economists...
The Baltic Dry Index reflects the cost of shipping dry goods overseas. If the stock market is rallying because the economy is improving, as some analysts argue... then the BDI should be pressing higher to reflect increasing demand for shipping goods. But the BDI is down 5% since late March.
Maybe divergences don't mean anything anymore. The market has definitely ignored them over the last couple months.
Then again... some things never change. And I still recommend caution in stocks right now.
While many folks are profiting on the relentless uptrend in stocks, a few traders are getting destroyed. You could be setting yourself up for a one-day loss of 20%-30%. Find out how right here.
"If history is any sort of guide," Jeff writes, "May is going to be an interesting month." See what other charts Jeff is watching this month right here.
Big bank uptrend continues... Bank of America, JPMorgan, and Citigroup break out to fresh multiyear highs.
Gold stocks are still struggling... Agnico-Eagle and Royal Gold touch fresh multiyear lows.
Airline stocks United Continental and Delta soar 75%-plus over the past six months.
Another bullish sign for consumer spending... fresh highs for Macy's and Starbucks.