I don't know if you remember, but back in May I sent Terry Laundry some charts showing divergence between the S&P and his T Theory Confidence Indicator (FAGIX:VUSTX) at every market major turn in the last 10 years.
With today's close on the S&P eclipsing April's high close, we are back in divergence mode on the Confidence Index:
For the record, in early 2009 we were in divergence mode on the T Theory Confidence Index for ten trading days before the reversal.
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The ratio does generally track the index and the divergences are useful.
ReplyDeleteSince divergences can be erased (this one no exception) I have been trying to anticipate what type of bond moves might move the ratio above the prior peak. Then the D'oh moment hit - if the SPX continues to grind higher it will either erase the divergence or become more obvious that it wont. Sigh.
My guess is also this time it will erase divergance. Its too early for major top like major bottom of march 09 or major top of 07 by cycles. Although everybody has different cycles just in general by P mid-term cycle I don't think we can have major top nearby.
ReplyDeleteRatio moving higher means junk bonds going higher and treasury going down.
Yash, that is one scenario. Also junk going up faster than treasury or going down slower. Also, the mix of bonds is not easily comparable to single etf's that might be tracked intraday - so it is hard to gauge by feel how the index is moving on many days.
ReplyDeleteAlso, I don't know that the divergence will be erased. The longer the rally lasts the more likely it seems that that will happen.
Hey guys
ReplyDeletethis divergence of the S&P and the confidence indicator is mirroring the same divergence that occurred in 10/07.. a peak in the confidence indicator in early Summer, and the divergence developing as the S&P rallied to new highs in the Fall. By the time the market rallied ended in 2nd week of Oct, the confidence indicator divergence was clear.
And bullish sentiment was rampant in Oct, 07 as it is now, in spite of obvious problems in the debt markets.
Bill
here is the linked stockchart for the confidence indicator and the S&P showing the 2007 divergence.
ReplyDeletehttp://stockcharts.com/h-sc/ui?s=FAGIX:VUSTX&p=D&yr=4&mn=0&dy=0&id=p38715861086&a=196239842
Bill
If you look back further, you will find many situations where the divergence didn't lead to a decline.
ReplyDeleteThe divergence is not a sure thing. Just like all other divergence in indicators, I would add a trendfilter there as a fail safe.
You're right, SC.
ReplyDeleteJust like every square is a rectangle but not vice versa, every major turn this century has seen divergence with the confidence index but not vice versa. Divergence between price and confidence seems to be a necessary condition for a major turn, but not a sufficient one as there are divergences that don't result in major turns.