5 Divergences Worth Noting

Here are 5 negative divergences worth noting.

Will someone please explain these to me? Is it QE to infinity? Distorted market signals? Or just investor savvy to know when to hold 'em or know when to fold 'em? We are wondering if and when these signals will have significance.

Divergence #1 is between the S&P Depository Receipts SPY and the i-Shares i Boxx $ High Yield ETF HYG. Note how HYG has not confirmed the high in SPY.

Divergence #1. SPY (blue) v. HYG (red)/ weekly

Divergence #2 is between the S&P Depository Receipts SPY and the Rydex Bullish and Leveraged to Bearish and Leveraged ratio (10 day moving average). The Rydex asset data is sentiment data, and it is based upon real asset flows into mutual funds. It is not an investor opinion poll. By tracking the money, we get to see how these investors are placing their market bets. The Rydex market timers represent a small segment of the investing world. Nonetheless, their actions remain a useful window into the mindset of investors.

The indicator for the most part tends to track prices. When there are too many leveraged bears, the indicator is below the green line, and we should expect a reversal in prices. This would be October, 2011. When there are too many leveraged bulls, the indicator is above the red line, and we should expect the market to “top out”. This would be April, 2012 and September, 2012.

But since the announcement of QE4 something interesting has been happening to the indicator. It is marking lower highs while price is making higher highs. In other words, the indicator is diverging negatively from price. The Rydex market timer is not buying the rally.

Divergence #2. SPY (black) v. Rydex Bull/ Bear Leveraged Ratio (red)/ daily

Divergence #3 is between the S&P Depository Receipts SPY and the Currency Shares Austalian Dollar FXA. Since the start of 2012, FXA has been making a series of lower highs while the SPY continues its march upward.

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Divergence #3. SPY (blue) v. FXA (red)/ weekly

Divergence #4 is between the SP500 and a composite indicator that measures the trends in the CRB Index, gold, and yields on the 10 year Treasury bond. Essentially, this is an indicator that assesses how well the Federal Reserve is doing at re-inflating the economy. (See this VIDEO for details.) The red dots on the price bars are those times that the Fed is losing the reflation battle. Most of the red dots occur either at the end of a monetary operation (i.e., QE2) or at the start of a new one (i.e., QE to infinity). Don't worry, the Fed has its finger on the pulse of the economy. Presently and by this measure, the Fed is losing the reflation battle, yet the market continues higher.

Divergence #4. SP500 (blue) v. Reflation Indicator (red)/ weekly

Divergence #5 is between the S&P Depository Receipts SPY and the PowerShares DB US Dollar Bear UDN. UDN is an ETF that goes in the opposite direction of the US Dollar. As the Dollar is devalued, we would expect the market higher. Or as UDN drops (i.e., Dollar higher), we would expect the market lower. Over the last 5 weeks, the Dollar and the equity markets have been going higher. Furthermore and since 2012, UDN has been going lower while SPY has been heading higher. Is this a measure of the increasing ineffectiveness of endless QE?

Divergence #5. SPY (blue) v. UDN (red)/ weekly