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Why It's Bad When Tech Doesn't Lead

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But aren't we entering the best quarter of the year?

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There have been a host of divergences that have triggered lately, and Kevin Depew has done a good job at highlighting them.

I want to touch on another one that popped up and it's one that historically has had a much more immediate impact than breadth divergences.

Yesterday, while the S&P 500 was busy closing at a new yearly high, the tech-focused Nasdaq 100 closed more than 5% below its own high for the past year. This is an unusual development, as often tech shares are either leading the broader market higher or at least not being so doggy.

The chart below shows the most recent historical precedent, from March 2005. You can see what happened afterwards, and actually this one conformed to the historical averages very closely.

Over the past 20 years, there have been 8 distinct occurrences of this kind of divergence. One month later, the NDX was negative after all 8 by an average of a little more than 3%. More tellingly, perhaps, the average maximum gain during the month was under 2%, while the average drawdown was greater than -5%.

Historically, it took about a week on average for the indices to top out – some topped immediately, others took a bit longer, but for the most part they were pretty well clustered. If this one follows suit, then we could expect some short-term trouble to begin once the end-of-month / beginning-of-month pattern gets played out and we enter the most volatile month of the year.

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No positions in stocks mentioned.

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