I realized this weekend that most of posts within the last 2-3 weeks about the anything pertaining to the equity markets have been negative. One might start to think I’m just a negative person who has a bad outlook on life.
So I thought I would write a post that quantifies and visualizes my negative sentiment.
Goldman's bear market indicator — which takes into account the unemployment rate, manufacturing data, core inflation, the term structure of the yield curve and stock valuation based on the Shiller PE ratio — is at a rare 73 percent, its highest level since the late 1960s and early 1970s.
The indicator is "flashing red," wrote Goldman chief global equity strategist Peter Oppenheimer. "Historically, when the Indicator rises above 60 percent it is a good signal to investors to turn cautious, or at the very least recognize that a correction followed by a rally is more likely to be followed by a bear market than when these indicators are low."
Although divergence is not an indicator based on a mathematical calculation, I believe it’s one of the most powerful indicators to a trader/investor.When people talk about divergence they are referring to the difference in movement between an oscillating indicator (i.e. MACD, CCI, RSI, Stochastic, etc.) and the price action
Negative divergence occurs in an uptrend when the price action makes higher highs that are not confirmed by the oscillating indicator. This indicates a weakness in the uptrend as buying is less intense and selling or profit taking is increasing. And when negative divergence happens on monthly chart, watch out.
I wrote about the negative divergence on the DOW two months ago.
I'm starting to see negative divergence on the other US equity markets as well.
Goldman is absolutely right, the correction will be followed by a rally before the crash because the Smart Money has to exit all their positions first and they can't sell all at once. Nevertheless, take heed to the divergence in the equity markets.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.
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by rollandthomas
