Seems they’re now big in quantum computing, whatever that is, and other things that are techy, tech. It seems there’s more here than just the thermostat on your wall – not very techy, tech, as Penny would say. Another company possibly misunderstood is Honeywell (231). If not share alike, seems SVB has contrived to share and not just bank. The chart is more that of a Tech stock, fitting given the former name of Silicon Valley Bank. SVB Financial (561) recently dropped “bank“ from its name, appropriate since the long term chart here looks nothing like that of a bank. As a practical matter, to participate you pretty much have to go big.Ī colleague recently pointed out a couple of stocks that no longer are what they may seem – in this case, a good thing. The markets, the big stocks, are making new highs with limited participation. If you look to the percent of stocks above their 200 day average, that is, in uptrends, the number is around 50%–60% depending on whether you’re looking at NYSE stocks or a broader measure. In a market that was at or near its high, NYSE new highs and new lows were even last week, while on the NASDAQ new lows were close to 3-to-1the number of new highs. That said, there are still technical issues. Then, too, this market has tended to dodge technical pitfalls all year. Just how it can go from three consecutive 2-to-1 down days to three consecutive 2-to-1 up days in a market that really isn’t trending, is a bit of a mystery. The market has taken on a better tone in the last few days, as often has been its way. We’re not saying do nothing, we are saying whatever you do, do it carefully. The longer these divergences last, the more you come to believe they don’t matter.
Divergences can go on and you can reap the S&P, or you can hope for the rest. The virtue in the stock market is discipline – stay with uptrends, cut your losses. Hope is a virtue in life, but a curse in the stock market. As long as the S&P moves higher most days, there’s hope, hope your stocks will catch up. You’re not making money but it’s okay because there’s hope. By definition, the big stocks go up – will Nvidia (221) ever stop? The dangerous part is that if you’re not in Nvidia, Microsoft (299) or the S&P, but instead you’re in the average stock, you’re in the A/D index.
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There’s risk in a backdrop like this, a two month plus divergence between the averages and the A/D index, yet there’s plenty of money to be made. In 2018 a few days resulted in a 20% decline, in 1987 the divergences lasted months.
All well and good in both theory and reality, the problem comes down to timing. Eventually the bad drag down the good, the average stock drags down the stock averages. As demand lessens so, too, will the number of advancing issues. It takes money to push up 2500 stocks every day.
As we have suggested before, the A/D index is more than just another technical indicator, it’s an insight into demand. As demand lessens the average stock and, hence, the A/D index peaks, while large-cap winners continue to climb higher. So what’s a divergence, and what do we mean by not working? The divergence in this case is between the large-cap averages, the Dow and S&P, and the average stock, measured by the Advance-Decline index.
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If you prefer the movie version, in The Usual Suspects, the line was the biggest trick the devil ever played was making you think he doesn’t exist. The trick divergences play… they make you think they’re not working.
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