Monday, March 22, 2010

Divergences Within and Across Stock Markets

What do Materials shares (XLB; top chart) have in common with Energy stocks (XLE; second chart from top), Technology issues (XLK; second chart from bottom), and Health Care stocks (XLV; bottom chart)?

All have failed to better their January highs despite new bull market highs in the major stock market indexes.

This might just be a sign of large cap underperformance, given the solid bull highs seen among midcap ($MID) and small cap ($SML) shares, as well as the new highs seen in the advance-decline line for common stocks on the NYSE and the number of stocks making fresh 52-week highs.

What gives me pause is that many international equity indexes have also failed to exceed their January highs. Those include EFA (stocks from Europe, Far East, and Australasia) and EEM (emerging market stocks).

As long as the indicators plow to new highs and we see small cap and NASDAQ stocks outperforming the S&P 500 Index, I continue to lean to the bull side per the recent indicator update. Should we see those smaller cap and more speculative issues roll over, however, and generate deterioration in the indicators alongside lagging in these sectors and international indexes, then I would become more aggressive in looking to the downside for stocks.


jo said...

Dear Brett,
many thanks for your blog. It gives me totally new insights, especially market directions based on advance/decline, new highs and lows. I think I am not for daytrading and to be honest have now clear system for swings. I have problems to enter and stay the swing. I am not advancing. I thought to define the trend with the weekly MACD and to enter with an Oscillator as Bressert or stochastiks combined with a divergence in the CCI and a 2 day trailing stop.
What would be your idea to define the trend for market direction? A/D (Breath) on a weekly basis? What are the sites for such charts? What could be a trigger and a stop? Who would like to share his/her ideas for such a swingsystem and form a trading group to trade for example the 10 strongest etf's for long and the weakest for short in line with the trend? Where or how to find such people? I think it would be an enormous help interchanging ideas, creating jointly a system and comment trends, triggers, trades, stops togehter based on a common idea/system? Please Brett give me more help. I need a push to go on.

Brett Steenbarger, Ph.D. said...

Hello Jo,

I do not use those kinds of technical indicators; sorry. I use Cumulative NYSE TICK, advance/decline lines specific to different indexes, and new highs/lows to define trend status. Each week I post indicators relevant to trend and momentum.