After navigating an early year stock-market correction, investors have seen the SPY climb back to new all-time highs.
While making new highs is bullish, it’s concerning when it comes with a significant divergence. In this case, it’s a momentum divergence.
And history has shown that while some divergences are ignored for weeks or months, there have been a couple in the past 20 years that have lead to significant declines.
Both of these momentum divergences came when the S&P 500 made a “second high.” Looking at the chart below, you can see that while the S&P 500 is trying to breakout in September (and making a second high), it’s seeing a lower momentum reading.
Two notable times we saw divergence patterns and readings like this were September 2000 and October 2007. History doesn’t always repeat itself, but it does offer investors a thoughtful reminder of why it’s important to pay attention to risk indicators – and to always have a plan.
The 2000 and 2007 highs took place within weeks of the first day of fall (9/21), as momentum was hitting lower highs. Stock bulls are keeping fingers crossed that it’s different this time!”