Conflicting Signals…

Hey Market Pilot,

The S&P 500 (SPY) and Nasdaq (QQQ) kept moving up last week, but I am concerned that they are not telling the true story. It seems those indexes are being led higher by a few outsized names. While they look good on the surface, the rest of the market appears to be moving the other direction.

There are a few ways to view this divergence. One of them is to look at the various indexes and note that the Russell 2000 ETF (IWM) and SPDR Dow Jones Industrial Average ETF (DIA) have been pulling back, while the SPY and QQQ keep moving up. We have seen this many times before, so maybe not a huge deal.

Another view is to find a way to isolate the more heavily weighted stocks in the SPY and give each ticker an equal say. You can do this by looking at the ticker Eql Wght ETF (RSP). This indicates that last week price moved down in a similar fashion to IWM and DIA. This should indicate that the SPY is up so much because of a few heavily weighted stocks as opposed to the broad base of many stocks.

I also like to look at the Short Term Futures ETF (UVXY) and VIX which are volatility indexes. These can give provide clues as to when traders are starting to hedge or prepare for a move down in the market. When I look at the UVXY compared to the SPY, I see that the UVXY has been basing while the SPY keeps trucking on up. In a normal market, these tickers should be moving inversely of each other.

This has me asking, why is the UVXY not going down with such a strong market?

We can also look at the internals. Below, I have attached a screenshot of the two basic internal readings I look at — buying vs selling volume flow on top and advancers vs decliners on the bottom.

Over the last several days, we have been seeing both sets of internals trending downward despite the two indexes pushing higher. This would generally indicate that more selling than buying is happening, and more stocks are going down than going up. Yet the two indexes keep rising. This suggests that only a few stocks are keeping the indexes up and broad-based participation is weak.

Keep in mind that we also have a short week this week. Action might move fast, so stay nimble, traders!

-Your Profit Pilot, TG


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