On the blog, we've been discussing why a more neutral approach to the market is best, as well as what we're looking for to mark a tradable bottom. Last week, we saw an expansion of new lows and stocks hitting oversold conditions in the Russell 3000. However, we are beginning to see some improvements in its daily momentum readings.
Below is a chart of the iShares Russell 3000 ETF (IWV) showing the recent lower low in price and higher low in momentum. While this is constructive, we need to see prices close back above their former lows in order to confirm this divergence and define our risk on the long side.
It's not just happening in the U.S. indexes. We're seeing a similar divergence in the STOXX Europe 600 and the Shanghai Composite.
As with any technical indicator or tool, the relative strength index is a supplement to price and needs to be confirmed before we can act on its signals. While the confirmation of these divergences would be a healthy development, the problem remains global breadth and the presence of significant overhead supply in most markets.
At the end of the 2015-2016 bear market, the majority of the global markets we tracked had momentum divergences that were as clear as day across multiple timeframes. Today, we're not seeing as many, and they're only happening on the daily charts. While that doesn't mean we can't see some sort of bounce in global equities, if the ones that have formed are confirmed by price, it's important to acknowledge that there's a major difference in the market environment that these setups occurred in.
Given the lack of widespread breadth improvements in the U.S. and globally, breakdowns in "risk appetite" measures like credit spreads and consumer discretionary vs. staples, and other factors we've discussed, I have a feeling that we'll be erring on the side of selling strength as opposed to looking for new highs as we were in 2016 and the first quarter of this year.
With that said, we'll continue to monitor the data as it comes in and update this potential scenario as needed.
Thanks for reading, and let us know your thoughts!