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Looking back at 2006/2007, several key market indicators started diverging from the S&P 500, before the large decline in 2007/2008 took place. The above chart compares the Staples/Discretionary and Russell 2000/SPY ratios against the S&P 500 over the past 5-years. The blue shaded areas reflects that both ratios started falling and diverging from the S&P 500, for the majority of the past 6 months.
This is the first time that both of these have been heading down together and diverging for this long against the S&P 500, since the 2007 highs. These ratios can been really important to your portfolio performance and the overall performance of the S&P 500. One day before the October low, the Power of the Pattern shared that Small Caps were poised for a rally. (See why here).
After that posting, the markets have experienced the strongest short-term rally this year and one of the bigger surprise rallies in years. In the following 30-days, XIV rose over 40% in value. Is this a bearish sign for the S&P 500 going forward? This divergence should be respected and it could matter. At this time until our Shoe Box indicator, High Yields and Advance/Decline start heading down together, it “doesn’t matter, until it matters!” When these indicators do start turning weak, I believe these divergences will matter, a good deal.
