Prices sometimes do not reveal the whole story. One must dig deep below the surface to determine the rotations. Buying or selling by smart money or institutional funds is often hidden, requiring further analysis.
The divergences and relative strength analyses can also reveal leadership shifts between asset classes, major stock markets, market capitalization, investment styles, and sectors.
Upon further studies, it can alert astute traders and investors to market bottoms and tops. Divergences between prices and relative strength trends can provide early signs of leadership shifts. Positive divergence can signal bullish trends. Negative divergence warns of bearish trends.
Different markets, sectors, and stocks also peak and bottom at various times. For instance, during the 2000-2002 tech/telecom dot.com bubble, the Dow Jones Industrial Average peaked in January 2000, or months before the broad (SPX) market top in March 2000.
Again, during the global financial crisis from 2007-2009, the S&P financial sector (XLF) peaked in May 2007 or five months before the broad market (SPX) top in October 2007. The divergences warn of impending market tops and bottoms.
Today divergences are developing in stock market indexes. For instance, the Nasdaq Composite Index (COMPQ), Nasdaq 100 Index (NDX), the technology sector (XLK), S&P growth index (SGX), and small caps/mid-caps (IWM and MID) peaked in November 2021. But other popular stock market indexes such as SPX, INDU, and NYA peaked later in January 2022.
Will the former growth leaders soon find bottoms since they sold off first?
Will selling broaden to encompass all markets and stocks, including the current market leaders such as value stocks, defensive names, commodities, and dividend-yielding income-related investments?
Looking at the price charts, stock prices have broken down and are in primary downtrends. Trendlines violated, moving averages rolled over, Fibonacci retracements breeched, and lower-highs and lower-lows are visible.
The price charts suggest a selling situation. However, positive divergences are developing, at least from a near-term basis. Also, the relative strength chart shows bullish implications for the battered growth and technology stocks. Refer to the attached charts for further information.
Earlier in the selloff, value stocks were the relative strength leaders. It is understandable for investors to lower their risk profile by rotating from high beta growth names toward value stocks and defensive areas.
A relative strength chart breakdown between the S&P growth index (SGX) and the S&P value index (SVX) trend confirms this rotation. However, in the past couple of months, value-related stocks have faltered as investors may be rotating back to growth, at least from a relative strength perspective.
Are these subtle signs of a hopeful market? A market anticipating a market bottom soon?
Amidst continuing inflation concerns, recession fears, and geopolitical uncertainties, it does not make sense to rotate out of value and defensive names into growth stocks.
Are smart money or institutional investors beginning to return to the marketplace by buying the battered growth and technology areas?
Are these temporary near-term rotations, or are these sustainable intermediate-to-longer-term shifts back into growth and technology?
We recommend investors and traders closely monitor this technical development into the start of a new quarter for confirmation of a sustainable trend and a market bottom.