Stock market indexes are experiencing an unusually high degree of daily fluctuations where the daily performances between various major indexes are diverging from one another. It is discerning that some indexes are closing much higher or lower than peers. It is even more significant that some market indexes traded in opposite directions, closing down and others up for the day.
The daily price performance dislocations were especially noticeable during the last two weeks of November and early December. The market reversal day on 11/22/21 first warned of potential problems as key indexes recorded intra-day record highs but closed down at the end of the day. Again, during the abbreviated trading day on Black Friday, 11/26/21, markets sold off sharply into the end of the day. And to start the new month on 12/1/21, benchmark indexes suffered negative outside days.
The above price dislocations and price reversals are not healthy technical conditions. If the inverse correlations between key indexes continue, this warns of a weak market not firing on all cylinders.
A brief analysis of the daily price performances among SPX, INDU, COMPQ, NYA, and NDX between November 18th to November 30th show wide divergences in price performances between the five key indexes. Please refer to the attached correlation chart and the excel spreadsheet for further formation.
The wide divergences between the Nasdaq markets (COMPQ and NDX) against INDU and NYA are especially disturbing. The difference in percentage points between the indexes has exceeded 1% in four of the eight trading days. The primary reason for the 1%-plus difference discrepancies between the different market indexes over the four trading sessions is that on those days, some indexes closed up while others closed down for the day. It is rare to witness such daily divergences in major market indexes. But to occur in four of eight trading sessions is disconcerting.
Near the end of the Tech/Telecom mania and before the dot.com bubble burst, inverse correlations and severe divergences were frequent. Divergences reached an extreme level in the weeks leading up to the March 2000 market top when INDU and Nasdaq markets completely dislocated from each other, as evidenced by the daily spreads reaching an extreme high at 2% points.
No two markets are ever the same. However, a healthy and sustainable broad-based market rally should not experience such wide daily price discrepancies and price reversal days. The recent divergences are not as extreme as the previous stock market bubble in March 2000. However, if dislocations continue and the daily spread expands, this warns of a market top.
Great work Peter. Thanks Tom