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Negative Divergence

If nothing else, what a fascinating market environment to be swimming in.

Image 1
  • Quantitative easing
  • Sovereign debt cris(es)
  • Exploding commodity costs
  • Plunging real estate values
  • Surging stock markets

And yet, I'm sure every generation feels the same degree of narcissism towards their place in history.

Maybe we're not that special and should drop the drama.

Markets go up, down and sideways - no?

"Things change, people change - hairstyles change...interest rates fluctuate." - Top Secret, 1984

Just because you're a part of the Quantitative Generation (Gen Q as my kids like to call it) doesn't give you the right to claim the mantel on the Wall of Shame.

Gen Y did bring us Snookie... and the Snuggie.

And yet, even in the face of such massive disachievement (trust me, it's an anthropologic term), I can't help but recall the Summer of 2007 in here. Markets were swooning; Chuck Prince was dancing; Jimmy Cayne was toking. We were walking on the precipice - moving along the hinge.

Interestingly enough, the markets were about to call Bernanke to the Court of Stimulus - he so famously now adjudicates. Perhaps they are getting ready to test his hand once again as we approach the conclusion of QE2. It would make for an interesting bookend.


 

A few things in the charts remind me of that intermediate top in late July 2007. Namely, the momentum in the markets and how they are reflected in a few of the technical metrics I follow. The key words here are negative divergence.

SPX Daily 2006-2007

It may be useful to use the late 2007 tape as a fractal guide over the next several weeks. None of us can see around the bend in the road, but we can look for the guideposts.

SPX Dailiy 2010-2011

Another aspect that is reminiscent of 2007 is the underperformance of the financial sector. By the summer of 2007, the financials (BKX) had already been in a declining trend of lower highs and lower lows for over four months. They were the canary in the market's internal mine and foreshadowed the eventual top in the broader indices. I am watching them again with great attention to see if they can get off the mat and start leading the market higher from here. If they can't catch a bid this earnings season, it doesn't bode well for the market going forward.

So stay frosty traders.

 

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