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Divergences sending bearish message to stocks?

Courtesy of Chris Kimble

The 2-pack below compares the Cap weighted and Equal weighted performance year to date of the S&P 500 and Nasdaq 100-

 

The chart above reflects that the equal-weighted S&P 500 ETF (RSP) and the equal weighted NDX 100 ETF (QQQE) have both underperformed the Cap weighted indices by over 25% this year. Both of the equal-weighted ETF’s over the month have trades sideways, while the Cap weighted are moving higher.

The lagging performance by the equal-weighted ETF’s reflects that fewer stocks are participating in the rally.

Below looks at Cap/Equal weighted ratios for the S&P 500 and NDX 100-

 

Divergences are taking place by both ratios as the S&P has been diverging since earlier this year and the NDX has been diverging the past few years.

The divergences by themselves do not mean the market has to head south right or a bear market is ready to start. Historically when fewer and fewer stocks are powering a bull market rally, it does reflect a thinning of the market and could result in unimpressive gains going forward.

Stock bulls want to see these ratios heading higher, not continuing to diverge.

Why you see chart pattern analysis with brief commentary:   There is a ton of news and opinions about markets and stocks that make the decision-making process more difficult than it needs to be.   

I believe the Power of the chart Pattern provides all you need to see what is taking place in an asset and determine the action to take. 

This approach has worked well for me and our clients and I encourage you to test it for yourself.

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