Three Divergences To Keep An Eye OnSeptember 08, 2014
We spend some of our analytical time exploring the relationship between various assets in an effort to understand the context of the market. Earlier in the year several divergences appeared that we took note of: 1) the trend of utility stocks vs. the S&P 500, 2) the trend of high yield bonds and 3) the trend of small cap stocks vs. the S&P 500. For a few months between April and August some of the divergences appeared to be closing, but recently they are diverging again.
In the charts below, we show highlight these divergences, which all suggest some caution toward the equity markets in the near term. In the first chart we show the relative performance of Utility stocks vs. the S&P 500. When utilities (bond substitutes) outperform, it is a risk-off signal.
Next is a comparison between the relative performance of small-cap stocks vs. the S&P 500. When small-caps underperform, this is a risk-off signal.
Last is a comparison between high yield spreads and the S&P 500. When high yield spreads are widening, this is risk-off signal as well.