The answer to the question posed in the title is, broad market participation. Last week we talked about some of the positive aspects of the markets for 2015 (Financials, Small caps and Nasdaq 100 outperformance), now we will look at some of the bearish divergences we are also seeing this year. It’s important to note that this is mostly a short term market observation. There are always two sides to every financial market transaction, so it can be of benefit to understand each side’s point of view.
We have seen some deterioration in the advance – decline line during this last pullback in the markets off the May 20 highs. The chart above plots the advance – decline line of the common stock that is traded on the NYSE. It remains in a bullish configuration overall, but the trend has taken a cautionary turn this month.
This chart shows the advance – decline percentage of the S+P 500 index on a cumulative basis, with the S+P 500 chart on the bottom. Basically the same bearish divergence as the A/D line took out its March and April lows this month, even though the S+P 500 average is still trading above. On a near term basis this means that a smaller amount of stocks are participating on the upside. Of course, this trend could reverse tomorrow for all we know. But for now, all we can do is go by the information that is currently available.
Now if we take a look at sector performance, we can see that 25% of the S+P 500 is outperforming (by outperforming I mean closer to it’s year to date high than the S+P 500 is) while the remaining 75% is further below their year to date highs. Now in fairness, only the Energy and Utilities sector (11% of the S+P 500 index) is significantly underperforming. But it’s worth noting nonetheless.