A Vintage Divergence

The Market

We finally got a little selling in the beloved Group of 10, which I was informed is really just seven or eight stocks.

Charts upon charts show the crummy breadth. Charts abound showing the divergences. I almost can’t believe my mother hasn’t called to ask about it. But that doesn’t make it not true.

It is a divergence that nags at me.

Many want to compare this to 2021. To me it feels different, because in 2021, it was not nearly as narrow as it is now. Or there is the comparison to 1999. That, too, is valid, but it was not nearly as narrow as it is today. I don’t know what to compare it to, but I did notice that this sideways pattern of the S&P (lower panel) and the nearly seven weeks decline in breadth (top panel) looked vaguely familiar. So I went back in my old charts today and looked at 1972.

I was surprised to discover that the Dow Jones -- the dominant index back then -- had a similar pattern to the S&P 500 today over the months from May through August: Sideways with an upward sort of bias. That’s the top chart in the blue box. Now look at the breadth: a steady downtrend.

Of course this begs the question if what comes after this is akin to that October rally of 1972 that you see on the chart (to the right of the blue box) or what came in 1973, which was a two-year bear market.

What I can tell you is that the selling today was quite extreme; if you look at the volumes in some stocks, it was quite high. Sure that’s the end of the month at play but was it enough selling to get a rally in the other stocks?

Just take a look at the Volume Indicator (chart below) that is now at 45%. While not exactly the same, it was similar to that November 2021 high. You can see the S&P toying at 4600 (red line) while the Volume Indicator is at 43%. The Volume Indicator had a nice splurge upward in December but it took us up to overbought in a hurry.

That’s a long way of saying there are an awful lot of stocks that are oversold, but thus far no one seems to want them I would end by noting that while the Volume Indicator is getting extreme (oversold) the Investors Intelligence bulls crept up to 48% and the bears nudged down to 23.3%. That bearish reading is the fewest bears since January 2022. So we have an oversold condition with complacent sentiment.

One final note on the Daily Sentiment Index. The VIX is still at 11 as today’s decline did nothing to lift it.

New Ideas

Remember when everyone said oil was going to $200? It seems neither do they. Today I saw no fewer than three well-respected analysts call for lower energy prices. They may be correct, but I figure I should at least point out that the DSI is 17 on crude oil. The energy exchange-traded fund (XLE) is getting into the price point, but if it can’t rally soon I will have to give up on it.

Today’s Indicator

The Volume Indicator is discussed above.

Q&A/Reader’s Feedback

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Bottom Fish DIS?: We are all dying to bottom fish the down-and-out names. And there are plenty of them to choose from. Yet in May it has not been a good idea to do so. Will Disney (DIS) buck the trend and turn upward in June? It is certainly at support so if it is going to do so, this $85-$88 area is the place for it to happen. But I’ll say this: If it does rally and can’t get over $90, be careful because the next time down it increases the likelihood that it breaks.

A Step for Amgen?: Last week I said I would understand if you wanted to stop out on Amgen (AMGN) breaking $225, but I really thought there was going to be a low/bottom in the making here. I still think so. And sure it’s been up two-straight days, but unless it crosses that $225 the jury is still out. Crossing that is the big first step.

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