Market Rallying Without The Financials: Not Necessarily Bearish — After poring over historical market data, I have come to the conclusion that technicals are not signalling anything right now. Technically, there is no reason for me to be bearish.  I tried to point to low volumes on this recent run up, the recent correction not being large enough, and as you’ll see in today’s blog, I tried to point to the divergence between the market and the Financials, all as reasons to short.  But as I mentioned in my blog yesterday, I am realising that fundamentals will be the driver of this market and they will be what pushes this market to the next direction.

If any of the aforementioned reasons were real bearish signs, my recent market models would have shown odds pointing to the downside. The probability of moving higher would have been low, not 50/50. I have also been digging deeper than usual into the data by examining each individual instance, looking back historically on daily charts. I literally have a couple days for my short thesis to come into play as I believed this rally might have been due to quarter end performance chasing. The market feels strong though, and things are starting to feel like year end in 2010, when everyone and his brother believed there would be a large correction once January came around.

Anyway, moving on to my analysis for today, I am looking at the Financials through the XLF and their divergence from the performance of the broader market. Financials have been lagging in the face of this recent market rally. Look at BAC, GS, MS.  Bearish sign? I thought so. But that is not necessarily the case, in my opinion at least. The 8D change in the SPYs has been +3.8% (as of Mar. 28) while the 8D change in the XLF has been +2.4%. The divergence here is -1.4%. In my spreadsheet model, I looked for all instances where the SPYs were up at least 3.5% over the course of 8 days and the divergence between the SPYs and XLF was more than 1.3%, where the XLF was lagging the market. This scenario has played out 39 times since 2000, or a little over 1% of the time.  In order to derive some tradable value from this study, I took a look at the following 5, 10, and 20 day change in the SPYs. Below are the probability outputs:

  5D 10D 20D SPY 8D Chg 3.50%     Divergence -1.30%     Next Time Period Pct Chg 0.00% 0.00% 0.00% Number of Instances 39     Number that Meets Criteria 19 23 22 Probability of Up >0% Next Time Period 48.72% 58.97% 56.41%So the negative divergence in an up market does not clearly signal anything, seeing that the probability of being up >0% in the next 5, 10, 20 day changes are lying around the 50/50 mark.  

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