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Market Lab Report - Serious Divergences Are A Red Flag

A major selloff in the NASDAQ Composite created quite the bifurcated market on Friday. Volume on the NASDAQ Composite has been far greater than on the S&P 500. Major averages have been split with the S&P 500 about flat while the NASDAQ Composite is off 1.6% at the time of this writing. Strangely, the advance/decline is 1.8:1 on the S&P 500 and 1.4:1 on the NASDAQ Composite. Helping the S&P 500 are the financials which extended gains from Thursday after the House passed the Financial Choice Act, which if enacted would pullback a number of the regulations established as part of the Dodd-Frank Act. Energy also acted well.

Such notable divergences are potential red flags for the market. Both Gil and I were remarking how we cannot remember ever seeing such a notably divergent day in terms of price and volume action. 

While some have suggested rotation out of technology names into other sectors such as the financials and energy stocks, rotation does not typically lead to such extremes in terms of what we are seeing today. 

Always heed your stops and wait until the dust clears before going long. At the same time, take neither a bullish or bearish stance so you remain open to all entry opportunities as they present in the coming days.

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