Important tops are normally preceded by clear divergences between price and breadth. But this is not always the case. In May 2011, for example, there was no classic divergence between the S&P 500 and the NYSE advance/decline line (Chart 1). The only hint of an upcoming correction was a two-month-old decline in the price of financial stocks (XLF) as seen in the lower panel. As financial stocks were the culprit of the 2008/9 bear market, the deep correction of 2011 was in one sense an echo of the prior crash.
Today’s market has parallels to 2011. Once again, there was no classic divergence between price and A/D line at the March 1st top (Chart 2). But the energy sector (XLE) had fallen for about two months. And energy stocks were the culprit of the 2015/16 bear market. This raises the possibility of an “echo” correction based on renewed troubles in the oil patch.
So as we counseled on March 13th, “Let’s be cautious here.”
Chart 1. Non-confirmation from financial sector in 2011
Chart 2. Non-confirmation from energy sector in 2017