David Moenning

About the Author David Moenning

David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980 and has been an independent money manager since 1987. Thus, Dave has been live on the firing line and investing for a living for more than 25 years.

Dangerous Divergence Developing?


It is rare that a single session can make or break a market trend. And while the jury is still out on which way Ms. Market is leaning at the moment, Friday’s action gave both teams something to crow about. You see, on the one hand the NASDAQ roared higher to another new all-time high on the back of the likes of Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT) and Google Inc (NASDAQ:GOOG). Yet on the other hand, the action in the rest of the major indices was just plain disappointing.

When the bulls are large and in charge, the type of action that occurred in the “four horsemen” of the NASDAQ would normally lift all market indices. But on Friday, while the NASDAQ 100 was rockin’ higher by +1.33%, the S&P gain totaled +0.23% and the Dow rose by just +0.12%. And things got worse from there as the Russell 200 actually fell -0.33%, the mid-caps dropped -0.41%, the banking index fell -0.70% and the semis were smoked for a loss of -1.66%. Therefore it is safe to say that the major indices were definitely not all rowing in the same direction on Friday.

Although one day does not a trend make, the case can be made that a divergence may be developing here. And while we did just review the charts on Friday, it is probably a good idea to go through the action of the major indices again this morning to see if the message remains the same.

For starters, there is no change in terms of the message coming from the S&P 500. In short, while the gain on Friday felt good for much of the day (well, until the late-day sell programs hit, that is) the trading range that began at the end of February remains intact. And while the bulls suggest that the major index is on the brink of a breakout, the bears will argue that another trip through the range is the most likely outcome here.

S&P 500 Index – Daily

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The chart of the NASDAQ though tells a completely different story. With the help of the biggest of the big names soaring to double-digit gains on Friday, the “NAZ” – along with its little brother the NASDAQ 100 – appears to be in a clear-cut uptrend. The bulls contend that Friday’s action put some distance between the index and the breakout level, which gives the composite some breathing room should prices pull back in the near-term.

NASDAQ Composite Index – Daily

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Usually when the NASDAQ enjoys a day in the sun, the small-caps go along for the ride – or perhaps even lead. However, Friday’s action was the complete opposite of the norm as the Russell 2000 declined on the day. Cutting to the chase, the action suggests that there is now some doubt entering the game here as a meaningful pullback in the near-term could easily break the uptrend that has been intact for months now. This remains something to watch.

iShares Russell 2000 (IWM) – Daily

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Finally, we move on to the tie-breaker: the mid-caps. The “middies” have been leaders for some time now and the weekly chart remains in pretty good shape. However, Friday’s action would appear to represent a fairly emphatic denial of the index’s entry into the Promised Land. The bottom line here is that when the semis, banks, and oils all struggle, the mid-cap index will too.

Midcap SPDR Trust (MDY) – Daily

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The message from the charts would appear to be that while the NASDAQ is dancing to the beat of its own drummer, the rest of the major indices are still stuck in the same ‘ol trading range. Thus, the 2120 zone on the S&P 500 would appear to continue to hold the key to the next move in the markets. But the real question of the day is if a dangerous divergence is developing. So, it is safe to say that this is no time to be asleep at the switch!

Turning To This Morning…

The song remains largely the same this morning as traders continue to discuss what the Fed will do and when, how the situation in Greece is going to turn out (the word across the pond today is that European leaders are now preparing for “Plan B” – a default), China’s ongoing ride for stock market investors (Shanghai soared +3% overnight), and the state of the earnings season. On that note, the world’s largest company reports after the close today and as such, you can rest assured that the coverage on the financial networks is likely to be Apple Inc. (NASDAQ:AAPL) -centric again today. And finally, U.S. stock futures currently point to a green open on Wall Street.

Related ETFs:


PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ)

PDR Dow Jones Industrial Average ETF (NYSEARCA:DIA)

iShares Russell 2000 Index (ETF) (NYSEARCA:IWM)


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