Despite Stock Rallies, Divergent Signals Remain
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I would like to present an update of charts that I have been monitoring, which may be providing a warning about global risk-assets (e.g. stocks, commodities, precious metals). I previously presented two articles (Is It Decoupling or Dangerous Divergences?, March 27th; and Trouble Ahead?, June 29th) that illustrated divergent chart indicators that may be signaling caution in regard to global markets, particularly the U.S. stock market. Below are March 27th, June 29th, and August 24th versions of those charts. Despite the recent rallies within some global markets, the divergences that I originally presented remain intact.
Although the Dow Jones Canada Stock Index chart did not yet follow through with its potential head-and-shoulders top formation, its potential as a divergent indicator remains intact. For instance, even though the S&P 500 continues to make or retest new post-2008 highs, the Canada stock index rests below trend-line resistance (e.g. shown in white) and is well below its recovery high set in early March of 2011.Canada chart from March 27th
Canada chart on June 28
Canada chart Now
The next chart review is of the German DAX Index. Despite its recent rally, it too rests just under resistance and well below its recovery high set in May of 2011.DAX on March 27
DAX on June 28
The Shanghai Indices chart is actually making new post-2008 lows. The bearish trend-channel remains firmly in place, as does the potential M-Top formation. This chart is currently 40% off of its high, which was set in 2009!Shanghai Indices Weekly Chart on March 27
Shanghai Indices on June 28
Shanghai Indices Now
Next is the NIKKEI 225 Index. You can clearly see that the falling bear channel remains in place, as the market trends lower from its 2010 rebound high.NIKKEI on March 27
NIKKEI on June 28
The Goldman Sachs Commodity Index (or GISKEY as we pit-traders referred to it back in the mid-90s) chart is next. The potential M-Top never formed as the neck-line held. But you can see how this chart remains in a long-term bearish trend, and is below both trend-line resistance and its post-2008 recovery high, which was made in 2011.GSCI on March 27
GSCI on June 28
Spot Copper hasn't changed much. It remains near its June 29th level, well below its 2011 peak.Copper on March 27
Copper on June 28
Finally, although gold has had a well-celebrated pop as of late, you can see how it remains in the confines of the triangle formation that I presented back in June; and well beneath its 2011 all-time high. However, gold is a real wild-card as global central banks continue to manipulate the world's fiat currencies.Gold on March 27
Gold on June 28
Conclusion - I posed the following question back in March, "Are global risk assets currently decoupling, with US large cap stocks assuming the leadership role because those companies are now on sound footing, or are dangerous divergences present that warn of trouble for US large caps, and perhaps risk assets in general? I ask this question because previously, some of these markets have led the S&P; that is, they made the first move, either up or down."
The reality is that one of these two possibilities will ultimately be correct. The correlation amongst risk assets is simply too high. Either the strength currently shown by the S&P 500 will ultimately spill over into other risk-asset markets, or the S&P 500 is one of the last favorably viewed markets by global investors. The latter would imply an eventual sell-off and a resumption of longer-term bearish trends.
Here are my thoughts on my own question. With global debt still at atmospheric levels, growth slowing in the undeveloped world, the problems in Europe, and a potential "fiscal cliff" in the U.S., I personally would rather err toward considering these observations as being divergent warning signals. I'd rather wait and see more confirmation that U.S. stocks are ready to lead the world out of the financial doldrums.
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