Signs of Divergence

The stock market pushed higher into new all-time highs this week but there are technical indicators warning this uptrend is on borrowed time. For one, the sentiment indicators are reading all-time highs in optimism. One of these sentiment indicators, the CNN Fear & Greed Indicator, has been reading “Extreme Greed” for several sessions. These indicators warn of complacency among investors which is common prior to a reversal in equities.

CNN Fear & Greed Indicator

Moving on to the chart of the S&P 500, we can see some divergences that should be noted (6 month chart). For one, 10Yr bond yields and the RSI (Relative Strength Indicator) both fell as the S&P continued rising this week – signaling a weakening uptrend. The last notable in the chart is the 2-bar outside reversal pattern to close out the week. This pattern is only two bars but combined with some of the technical divergences, it makes the open in futures something to watch (futures start trading at 6pm on Sunday).

S&P 500 Index

If we have a down open tonight and a push lower this week, we can begin to get a read on which degree of correction is underway. This chart also shows how treasury yields and the S&P have diverged for some time which signals the rise in equities this past year may not be sustainable.

If we push higher next week, the market will move into a place where a sharp reversal is more likely especially if the technical divergences continue. In either scenario, we should have a corrective move in equities coming up sometime in January.

Chart of the Week!

Economic & Central Banking Snippets 

  • The ISM services index for December rose to 55 from 53.9 – the internals were mixed as only 10 of 18 industries saw growth.
  • The December Japanese services PMI was revised to 49.4 (down from 50.3 in November) which is the weakest in more than 3 years. According to survey provider Markit, “Overall, survey data for the 3 months to December imply that 4th quarter GDP is likely to contract.”
  • Driven again by skyrocketing food prices, China’s December CPI rose 4.5% y/o/y. Food prices rose 17.4% y/o/y – driven by pork prices which were up by 97% y/o/y. (Investopedia)
  • Non-farm payrolls came in at +145,000 for December while unemployment stayed at a 50-year low of 3.5%, capping a tenth straight year of payroll gains. Private-sector wages advanced 2.9% from a year earlier, the smallest annual gain since July 2018. And revisions showed payrolls for November and October were revised down by a net 14,000. (WSJ)

Macro Snippets

  • Borden Dairy, a 163-year-old milk producer known for its spokes-cow Elsie, filed for Chapter 11 bankruptcy protection. The company blamed falling milk consumption, rising raw-milk costs, increasing freight costs due to driver shortages pressuring wages, and the growing clout of retailers consolidating with other merchants or beginning to develop their own milk-processing operations. Borden, with $1.18 billion in 2018 sales, is one of the U.S.’s largest milk producers. The nation’s largest, Dean Foods, filed for bankruptcy in November. (Investopedia/WSJ)
  • Elon Musk’s SpaceX has launched 60 more Starlink satellites on a Falcon 9, making it the largest commercial operator of satellites. The company is currently building an advanced broadband system in space that will beam high-speed internet to remote areas. It is aiming to provide service in North America this year and globally by 2021. (Investopedia)
  • Leveraged-loan values sink on earnings and debt worries. The lower reaches of the market for corporate loans have suffered sharp declines in recent months, a sign of growing aversion to earnings shortfalls or other strains at indebted companies. (WSJ)
  • Ford Motor’s U.S. sales fell 3.2% in 2019, reflecting cooling demand in the U.S. auto market. The No. 2 U.S. auto maker by sales said it sold about 2.41 million vehicles last year, down from around 2.49 million in 2018. Overall, U.S. vehicle sales fell 1.6% last year, to 17.1 million vehicles, research site said. (WSJ)
  • General Motors posted its biggest-ever sales drop in China last year and warned of a tough 2020, underscoring the challenges that U.S. car makers are facing as a protracted decline grips the world’s largest auto market. (WSJ)
  • 1640 CEOs left the corner office in 2019 – a record high for departures by the heads of U.S. businesses. The number topped the 1,484 exits in 2008 when the country was embroiled in the financial crisis, according to executive outplacement firm Challenger, Gray & Christmas. (Investopedia)
  • Uber is changing its fee structure in California to adapt to the new AB5 law that threatens its entire business model. Reuters said drivers will still get paid per mile and minute, but the company will take a fixed 25% cut. Customers seeking private rides will see estimates instead of fixed prices. (Investopedia)

That is all for now and thank you for being a subscriber. 


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.