[edit] see correction above the final chart. Thank you RD for catching this!
Let’s get an in-week picture of the US stock market’s internals and couple unhealthy internal divergences, beginning with the one that has worked best to forecast recent corrections, the inverse of SPX and the VIX.
As noted previously, this indicator has given signals about oncoming corrections when the VIX has risen while nominal SPX has declined (SPX went up). The current divergence has been in play for for a while now but I have not loved it because VIX was declining, just not nearly at the rate Inverse SPX was. Yesterday something interesting happened. The market went up and VIX went up too. May be a one day twitch or it may be the start of something.
If VIX starts rising now we’ll have a full on negative signal. Looking at a chart its trend is still down, but the signal appears dangerous and could become more so.
The divergence between the equal weight SPX and headline SPX continues to flash a warning on the health of the market’s breadth. This too has been a darn good correction signaler (although timing is not part of its efficacy).
SPX new highs/lows is and has been on a negative divergence for all of 2020.
NDX new highs/lows is better, but still a negative divergence.
When looking at the more old fashioned stuff, which has been playing catch up lately, the internal view of Transports vs. Dow continues to be healthy.
Consumer Discretionary vs. Staples is also healthy and bullish.
Junk Bonds are okay and the ratios of Junk to Treasury and IG are still firmly in bounce mode, so no alarms here.
Finally, the leadership chain shows Tech Tech and more Tech is what market participants want. It’s a mania sure, but it’s still intact. I am watching the Semis (SOX) to see if they break down vs. Tech. At this point it’s not looking good but a lower 2020 low in the ratio [would turn it bearish].
In my view the above present a picture of a still intact manic market situation that is at increasing risk by two of our most reliable indicators. As for timing, you tell me. I don’t have a crystal ball. But my goal is to remain aware of risks, continue to actively manage cash and stay balanced, in my views as well as holdings.
