Market Analysis: Sentiment Trader on Negative Divergences

In last night’s report, Sentiment Trader (if you don’t subscribe, do so asap) noted the following negative divergences for the US equity market:

“For the first time since November 2014, both Smart Money and Dumb Money Confidence are above 60%. This is highly unusual, with only 39 total days since 1999. Over the next 30 days, the S&P 500 showed a positive return after only 6 of those days (a 16% win rate) with an average return of -3.4%, risk of -7.0% and reward of +2.2%.

“The S&P 500 was positive on the day and is within 1% of a new high, yet the Up Issues and Up Volume ratios on the NYSE were both below 40%. That has only happened on four other days since 1962, all recently (2014-11-13, 2015-07-17, 2015-07-20, and 2017-05-04). Generally, splits like this lead to negative returns in the short- to medium-term.”

Nothing overly alarming – the market is simply setting up for a 3-7% dip. It has been an unusually long period of time since a 5% dip; and with the Barry Ritholtz/Josh Brown/Ben Carlson*s* of the world plowing any and all poor souls they can get their hands on into “passive” investment products in order to avoid the fate of their favorite straw man – i.e. the investor that sold out at the bottom in March 2009 and has been too scared to get back into the market ever since – it is only natural that sentiment has become complacent enough for such a dip.


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