Saturday, November 2, 2013

Negative divergences in the broker/dealer stocks

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]