The
NYSE Securities Broker/Dealer Index (XBD) is currently reflecting one of the
most prominent divergences of any major index.
You’ll remember from our previous discussions in this report that XBD
has long been an important leading/confirming indicator for the broad
market. What happens to the XBD usually
ends up happening to the S&P.
Although
the path of the XBD index itself has been higher in recent months, several
technical indicators for the index have gone the opposite direction. Take for instance the MACD indicator shown in
the following chart. It has clearly
established a downward-sloping path since at least June, with each peak lower
than the previous one.
I
normally don’t use the Relative Strength Indicator (RSI), but a subscriber has
brought to my attention an equally negative divergence in the RSI indicator for
the Broker/Dealer Index (see chart below).
He writes, “What an ominous looking RSI
non-confirmation of the $XBD, which usually leads. Makes me un-zip my bull costume right now and
be ready to rip it off. Not yet, but
stuff like this is chilling!”
In
a bear market rally these divergences would be absolutely fatal. In a liquidity-fueled bull market like the
one of 2013, however, individual stocks and even entire sectors can ignore such
divergences for long periods. It’s
possible that XBD will ignore the negative divergences that are now visible in
its technical indicators. But with an
upcoming interim weekly cycle peak the market, along with the broker/dealer
stocks, will become more vulnerable to external shocks, bad news, etc. After
the cycle peaks…it could make for volatile trading later in November. [Excerpted from the Nov. 1 issue of Momentum Strategies Report available at http://www.clifdroke.com/subscribe_msr.mgi]
