While the S&P 500 breaks through 1900 and traders rejoice over the fresh new high, it seems the same level of excitement is not being felt in other parts of the market. There are multiple divergences that are taking place and showing a lack of confirmation. On my blog I’ve discussed multiple times the lack of participation in momentum for the S&P 500, but we can also see divergences in bonds, small caps, and defensive sectors showing leadership. However, the two measures we are seeing excessive risk taking in are the Put/Call Ratios and the Volatility Index, which is sitting at historical lows. The other measures I follow appear to be negatively diverging from the overall equity market.
Exam[ples Follow
Below is a chart I referenced earlier this year; it shows relative performance of High Yield Corporate Bonds (ARCA:HYG) vs. U.S. 20+Year Treasuryies (ARCA:TLT). In the bottom panel we have the 10-Year Treasury Yield (TNX). For the bulk of the current bull market we’ve seen these two measurements for the bond market confirm the movements in equity prices. As stocks go up, so does the ratio between HYG and TLT as investors show preference for the more risky high yield market over government debt, and same for the 10-Year Yield which often moves with the stock market. However, that’s now the case today. We have a glaring divergence forming in both measures of risk within the bond market, something we haven’t seen since the 2011 and 2012 highs.
Next we have a chart showing the S&P 500, PowerShares Nasdaq (NASDAQ:QQQ) and the Russell 2000 iShares (ARCA:IWM). While the S&P hits new highs the Nasdaq and Russell 2000 are off nearly 5% from their 52-week highs. SentimenTrader.com wrote in a recent note that some examples of past instances of this occurring are: 1983, 1987, 1990, 1998, 2000 and 2006. Jason wrote that the eventual ‘reaction’ of this divergence in the S&P 500 varies in length, “from immediately (’83, ‘90’, ’00) to over a year (’06).
If traders were feeling more confident in the upswing in stocks, why aren’t they bidding up these higher beta indices?
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