Saturday, September 13, 2014

Blatant Divergence Is Upon Us Again

The short term divergence that has been happening will probably catch up to the indices in the short term and it will probably cause a small pullback.  I am not a big fan of negative divergences in a bull market, I literally laugh out loud every time I see a blog post about it.  Eventually when we finally get more than just a normal pullback they will be right and we’ll never stop hearing about it.  In bull markets I believe that 99% of all negative divergences should be ignored until it is actually blatant, where it gets to a point that its comical and you feel sort of an admiration for the boldness of how it is being done.  I don’t normally feel this way, the last time was July 24th as you can see here;
This is the post I wrote about blatant divergence on 7/24/14–In Case You Are Struggling, I felt similar a year ago when I wrote “ignore the divergences” , all you have to do is plot the dates on the SP500 7/24/14 and 8/14/2013.  These last 2 weeks I’ve been stating right here on the blog how my daily watch-lists has been short as far as names and the performance has been lackluster.  My rolling 5 day watch-list is my best barometer for how well the market is doing, and how much I should press on the gas.  The indices only tell you 1/8 of the story.
The markets have been going sideways for 12 days after a decent move up, most technicians would call the current set up a bullish flag, bullish resting period, etc….When you see this type of set up in most cases you get a continuation move in the direction of the precedent trend, in this case up.  But while the market has been resting there has been masterful distribution of stocks underneath the surface that might bring a small pullback.  This is all short term stuff, if you are a long term investor this means nothing unless this turns out to be THE BIG ONE that we have been warned about since 2009, however when you accepted the fact that you were a long term investor that means you accepted account volatility and at times large draw-downs, so you are all good.
Here are 2 charts that show you what has been happening underneath the surface, what you see is the Nasdaq going sideways for 12 days while breadth has been deteriorating in a big way.  What you want to see is the indices move sideways like it has but with individual stocks still performing well underneath the surface while the market catches its breadth for the continuation move, that has not been happening.
Nasdaq vs stocks above their 40 day moving average
Nasdaq blue vs 10 day moving average (red) of advancers – decliners for the Nasdaq, NYSE, Amex

Frank Zorrilla is the founder of Zor Capital LLC a New York based investment management firm.  Our goal is superior performance, with preservation of capital as our number one priority. Zor Capital manages separate accounts (both taxable and retirement) for accredited investors and institutions. This structure gives clients access to a hedge fund like strategy while maintaining 100% control of their accounts.  Managed Assets

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