Chris Ciovacco

About the Author Chris Ciovacco

Chris Ciovacco is the founder and CEO of Ciovacco Capital Management (CCM), an independent money management firm serving individual investors nationwide. The thoroughly researched and backtested CCM Market Model answers these important questions: (1) How much should we allocate to risk assets?, (2) How much should we allocate to conservative assets?, (3) What are the most attractive risk assets?, and (4) What are the most attractive conservative assets? Chris is an expert in identifying the best ETFs from a wide variety of asset classes, including stocks, bonds, commodities, and precious metals. The CCM Market Model compares over 130 different ETFs to identify the most attractive risk-reward opportunities. Chris graduated summa cum laude from The Georgia Institute of Technology with a co-operative degree in Industrial and Systems Engineering. Prior to founding Ciovacco Capital Management in 1999, Mr. Ciovacco worked as a Financial Advisor for Morgan Stanley in Atlanta for five years earning a strong reputation for his independent research and high integrity. While at Georgia Tech, he gained valuable experience working as a co-op for IBM (1985-1990). During his time with Morgan Stanley, Chris received extensive training which included extended stays in NYC at the World Trade Center. His areas of expertise include technical analysis and market model development. CCM’s popular weekly technical analysis videos on YouTube have been viewed over 700,000 times. Chris’ years of experience and research led to the creation of the thoroughly backtested CCM Market Model, which serves as the foundation for the management of separate accounts for individuals and businesses.

Breadth Divergence: Are The Bulls Missing This?


Negative/Bearish Divergence

Yesterday, we covered an analysis about a potentially bullish signal in market breadth. A common form of feedback was:

What about the divergence between market breadth and the S&P 500…doesn’t that look like October 2007?

The present day divergence is explained in the chart below.

A Showstopper For Bulls?

In this article, we are attempting to answer a simple question:

Is it possible for a bull market to continue after this divergence appears?

Four Historical Examples

In a very unscientific screen, we quickly found the four cases below with similar “bearish” divergences:

Did Stocks Continue To Rise?

In these anecdotal cases, the divergence between market breadth and price did not help predict the end of a bull market. The table below shows the dates the divergences appeared in 1995, 1998, 2004, and 2006. The right side of the table shows how much further the market carried before the bull market morphed into a bear market.

Therefore, the answer to our question is:

Yes, it is possible for a bull market to continue for quite some time after a negative breadth divergence similar to the one in place now.

Divergences And The Weight Of The Evidence

Is the current divergence irrelevant? No, it has meaning, but it is one of many inputs to consider. Since the weight of the evidence has supported the bullish case over the last four weeks, that takes precedence over the potentially bearish divergence. Could the divergence be “right” and the market “wrong”? Yes, but (NYSE:A) that is a lower probability outcome and (NYSE:B) the rest of the evidence will shift if the divergence proves to be helpful, something that has not occurred yet. A tweet from earlier today sums up our approach to all divergences (bullish or bearish).

If the weight of the evidence begins to shift, we are happy to adjust as needed. For now, we continue to hold an equity-heavy (NYSEARCA:SPY) portfolio, with a relatively small and deflation-friendly stake in bonds (NYSEARCA:TLT).

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