Divergences
Subtle hints
Divergences in the stock market can be a confusing concept for investors to understand. Simply put, it refers to when different indicators or measurements of market performance move in opposite directions.
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One example of this can be seen in the last half of 2021, where the S&P 500 increased in price, but the percentage of stocks above their 50-day and 200-day moving averages was declining. This indicated that a large portion of individual stocks were not participating in the advance, despite the index moving higher.
While not all divergences are a sign of an impending market reversal, they should be a warning sign worth paying attention to. Understanding these divergences can help investors make more informed decisions and potentially identify opportunities or risks in the market.
Recently, we saw the opposite divergence of what we saw in 2021. The price of the SPX had moved lower, while the percentage of stocks above the 50-day and 200-day moving averages held steady and increased. This divergence suggests that while the overall market was trending downward, there were still individual stocks that were outperforming the index.
It is important to note that just because we have this current divergence does not mean we will necessarily see higher prices in the future. However, it does suggest that investors should at least be open to the idea of higher prices and should continue to monitor the market for any potential opportunities.
Another aspect to consider when analyzing market divergences is the flow of money. One example of this can be seen by once again examining the percentage of stocks above their 50-day and 200-day moving averages. Starting from December 28th, which marked a local low, we can see that on the S&P 500, this percentage has only slightly increased. In contrast, if we look at the Nasdaq, we can see how the percentage of stocks above their moving averages is steadily climbing, indicating stocks in the Nasdaq have been outperforming lately.
This can provide insight into where investors are allocating their capital and can potentially signal future market trends. By paying attention to divergences, investors can potentially identify risks and opportunities in the market and make more informed investment decisions.
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The content presented is for informational and educational purposes only. Nothing contained in this newsletter should be construed as financial advice or a recommendation to buy or sell any security. Please do your own due diligence or contact a licensed financial advisor as participating in the financial markets involves risk.