Asset Management & Market Research

Divergence between breadth & momentum concerning

As illustrated in the chart below, there are lots of divergences between breadth and momentum on the S&P 500.  The first indicator slice below the chart (green line) is the % of S&P 500 components with RSI readings between 30 and 70.    Typically, in solid up-trends, the % of S&P 500 issues in the aforementioned range stays north of 65% (noted by horizontal black line).  When it starts to slip below 65%, typically deeper corrections occur.  Presently this indicator is still OK.  The second indicator below the price chart is the % of issues in the S&P 500 at 52-weeks highs (orange line).

kl breadth divergentNote every good correction since 2007 (black arrows) saw less and less new highs as the market rose .  Presently this indicator shows weakening momentum and sponsorship.  The last indicator represents the % of issues in the S&P 500 at 12-weeks highs (purple line), which while a derivative of the 52-week high indicator, acts as an early warning signal.  This % number is close to 0% presently for S&P 500 issues.    So it is easy to see that this advance has weaker legs underneath it than in months past.

The price overlay (green band over price) on the chart is a 100-day moving average with a 3% filter line.  It has captured most lows and followed the trend well.  

Bottom line – internals are weakening and a break below the most recent low near 1,740 would be a negative.

Author: Kevin Lane

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