Mid-week market update: I am publishing this earlier than usual as the U.S. markets are closed for the Juneteenth holiday.
The S&P 500 has gone on another upper Bollinger Band ride, accompanied by a severely overbought reading on the 5-day RSI, which is over 90%. Overbought conditions are often not bearish, but a manifestation of strong price momentum, otherwise known as a “good overbought” signal. That’s bullish, right?
Here is what’s different this time. The overbought condition occurred along with signs of weak breadth, as evidenced by a series of negative net highs-lows on both the NYSE and the NASDAQ even as the index made new all-time highs.
Negative divergences
Signs of poor breadth are confirmed by negative divergences from risk appetite indicators. Even as the S&P 500 advanced to new all-time highs, equity risk appetite, as measured by the relative performance of high beta to low volatility stocks (dotted red line), have been trading sideways since mid-April. A similar pattern can also be seen in the relative price returns of junk bond to their duration-equivalent Treasuries. What’s worrisome is both indicators weakened in the last week even as the S&P 500 rose.
Poor breadth is also triggering a Hindenburg Omen cluster for NASDAQ stocks, which is an indication of a highly bifurcated market that’s losing price momentum. There have been 15 clusters in the last 10 years. Nine of them resolved bearishly and six did not.
As well, the put/call ratio is nearing a crowded long condition, which is contrarian bearish.
