Take Heed To The Divergence In The Equity Markets

in #stocks5 years ago

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I realized this weekend that most of posts within the last 2-3 weeks about the anything pertaining to the equity markets have been negative. One might start to think I’m just a negative person who has a bad outlook on life.

So I thought I would write a post that quantifies and visualizes my negative sentiment.

Goldman's bear market indicator — which takes into account the unemployment rate, manufacturing data, core inflation, the term structure of the yield curve and stock valuation based on the Shiller PE ratio — is at a rare 73 percent, its highest level since the late 1960s and early 1970s.

The indicator is "flashing red," wrote Goldman chief global equity strategist Peter Oppenheimer. "Historically, when the Indicator rises above 60 percent it is a good signal to investors to turn cautious, or at the very least recognize that a correction followed by a rally is more likely to be followed by a bear market than when these indicators are low."

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Although divergence is not an indicator based on a mathematical calculation, I believe it’s one of the most powerful indicators to a trader/investor.When people talk about divergence they are referring to the difference in movement between an oscillating indicator (i.e. MACD, CCI, RSI, Stochastic, etc.) and the price action

Negative divergence occurs in an uptrend when the price action makes higher highs that are not confirmed by the oscillating indicator. This indicates a weakness in the uptrend as buying is less intense and selling or profit taking is increasing. And when negative divergence happens on monthly chart, watch out.

I wrote about the negative divergence on the DOW two months ago.

The Dow Finally Joins The Party

I'm starting to see negative divergence on the other US equity markets as well.

S&P 500

NASDAQ

Goldman is absolutely right, the correction will be followed by a rally before the crash because the Smart Money has to exit all their positions first and they can't sell all at once. Nevertheless, take heed to the divergence in the equity markets.

This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.

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by rollandthomas


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In November 2007 stocks started to fall, but the 'real economy' was doing good: everything was fine. No crisis yet.

In addiction, between 2009 and 2012 the stock market recovered the losses (image below). Although, from 2009 to 2012 were the years with the most negative news. Banks were in the proccess of bailing out, people lost their houses, retirees saw their stock market savings drop by 40% by the end of 2008 and countries like Portugal (where I live), greece and ireland needed finnacial help from the IMF.


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If you go back the dot.com buble the same thing happened.

I think the 'real economy' doesn't perform the same way the stock market performs. Usually the stock market falls before the economy because the 'smart money' knows when to exit. I really enjoy the majority of your posts and I think you should focus more on what the central banks are doing because those guys drive the stock market up and down.

Tell me what you think.

In my steemit account I only do technical analysis, but I think it's important to watch what central banks are doing. Tell me what you think of my last analysis on the S&P500 which is related to this one.

Awesome comment and posts. Yes, the Markets are on avg. 9 months ahead of the economic cycle. I do follow the US Feds and currently paying attention to the yield curve and interest rates. I thought the yield curve would invert in Dec...I might be wrong...and 3.5% on the 10 yr is when I said things should really get interesting in the equity markets.

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