One of the warning signs of the impending sell-off in February and March this past year was a bearish divergence in momentum. Now, as we close out this tumultuous year, we find ourselves in a similar situation of US Stock Indexes hitting all-time highs with bearish divergences in the 14-period RSI.
However, when looking at momentum, or any other technical indicator, we must always contextualize current readings to better understand the information presented. Once we do this with the most recent data, the differences in the current signals and ones seen earlier this year become quite clear.
What really stands out today is the narrow scope of these readings in comparison to February. I believe that this not only implies market strength rather than weakness, but also the nature of current market rotation.
First, let's look at this past February. The abrupt weakness in momentum was widespread, covering large-caps, mid-caps, small-caps and even global equities. This can be seen in the charts below.
Unlike the beginning of the year, the current shift in momentum is not nearly as abrupt, and is mainly seen in large-cap indexes.
The S&P 500, the Dow Jones Industrial Average, the Nasdaq 100, Mega-Caps ($MGC) and Momentum Stocks ($MTUM) all exhibit bearish divergences in the 14-period RSI.
Where are we not seeing divergences in momentum at present?
Pretty much everywhere else...mid-caps, small-caps, micro-caps and international indexes.
Mid-caps might struggle with posting strong, overbought readings, but nonetheless momentum supports higher prices.
Also, small-cap price action is currently reinforced by momentum. It might not be explosive, but it lacks any sign of bearishness with an RSI reading greater than 70.
I believe the rotation out of large-caps into the rest of the stock market is presenting itself through these shifts in momentum. The idea of bearish momentum divergences in the large-cap indexes is not supported by the rest of the market.
Not only is the bearish interpretation not supported by domestic markets, its also not supported by international markets.
If you want a quick snapshot of the global equity markets, it doesn't get much better than the Global Dow. It's an equally-weighted index of the best stocks from both developed and emerging markets. Like most stock indexes, the Global Dow produced waning momentum headed into the spring last year. Today that is not the case.
The charts above represent broad market participation as numerous indexes break to all-time highs. However, the former laggards are doing so with stronger momentum in comparison to the former leaders. This shift in momentum speaks to rotation into SMIDS, micro-caps and global equities, more so than any significant, oncoming market weakness.
It is through the process of contextualizing and comparing these momentum readings, that we can arrive at a deeper understanding of the information presented.
Could we see a market correction?
Absolutely!
However, we aren't seeing the warning signs of broad market weakness in momentum.
Thanks for reading! If you have any questions or comments, please feel free to contact me at ianculley@culleycharts.com
DISCLAIMER: All information and opinions expressed by Culley Charts are strictly that, and should not be construed as investment advice. Market participation comes with inherent risk, and the responsibility of managing this risk lies solely with each individual investor.
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