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Divergences Widen

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Bulls say, "All bad news is already baked into the efficient markets."

I say, "No kidding."

Divergences have done nothing but widen this week as foreclosure gate lingers. All one needs to do is take a look at any bank stock or index as we will shortly in some charts below. In other news, INTC and AMD both go rage against the machine to the upside in the after hours trading sessions only to sell off for the rest of the week in the real trading session.

For a primer on the importance of Financials, see Financials Underperform and Watching the Banks. Basically it comes down to this: Financial stocks comprise roughly 20% of the S&P 500 Index to make it the 3rd highest weighted sector. In a bull market, the heavy weights needs to take part in the upside, otherwise you get negative divergences as investors pile into the few remaining sectors or stocks that are going up.

As one of the lone bears out there, my case for for the downside appears below. In the charts that follow, take note of the divergence when compared to the SPX above. When observing the charts below, ask yourself if you would buy or sell based off these charts.

$BKX looks ugly here as it has completely fallen off a cliff in the past two weeks below the Jan lows.
Technical Analysis of TSP Funds-bkx4-png

KRE:SPY, same thing. Nowhere near the April high.
Technical Analysis of TSP Funds-kre4-png

XLF:SPY, pure ugliness. Blame it on BAC if you like, but remember that charts don't lie. All bad news is baked in and here's the dish.
Technical Analysis of TSP Funds-xlf4-png

A market bellweather, INTC, reports blowout earnings. The street rejoices, headlines say it's all clear to buy, the stock hits 20 in the AH, opens at 20 and then falls off a cliff.
Technical Analysis of TSP Funds-intc-png

But wait, I'm not all doom and gloom. Here's a little bull food.... or is it bear food in disguise. XLK (technology sector) is outperforming the past few weeks, but it remains below it's January high causing another negative divergence.
Technical Analysis of TSP Funds-xlk-png

Conclusion: Investors continue sell the dollar in order to to pile into the ever narrowing bull market in high yield junk, hot stocks such as AAPL, and commodities such as gold, silver, corn. All commodity purchases are made on margin (sell the dollar) and when it unwinds, the repercussions will reach the entire market.

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  1. Birchtree's Avatar
    The banks are definitely better buys now than they were in April - now they only have one way to go and that's up. Yes, they will make a valuable contribution to the SPX powering the index into the 1300 range and perhaps beyond. Thanx for the visuals.
  2. Jaded Flashback's Avatar
    Good analysis. I will be paying more attention to your work Sir.
  3. Bullitt's Avatar
    Thank you Jaded. I haven't been able to update as much as I used to, but I would like to try to put in an entry at least bi-weekly.

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