BREADTH FIGURES CONTINUE TO SHOW NEGATIVE DIVERGENCES

MORE NEGATIVE DIVERGENCES... My message from a couple of weeks ago showed various measures of market breadth failing to keep up with the S&P 500 which suggested that the current stock rally was on weak technical footing.     Unfortunately, that situation hasn't improved.   A number of breath measures continue lag behind the SPX.   Two of them are shown in Chart 1.   The black bars in the lower box show the S&P 500 up against potential chart resistance at its February peak.  That's an important test.  The red line in the top box shows the percent of S&P stocks above their 200-day moving average trading well below its February peak.  That negative divergence suggests that the broader market is failing to keep pace with the SPX.   The blue line in the middle box shows the percent of SPX stocks above their 50-day average weakening as well.   In fact, the blue line peaked in early December near 90% and has since fallen below 60%.   Both lines suggest that fewer stocks are participating in the market rally.

SMALL CAP DIVERGENCE... Chart 2 shows where a lot of the weakness in market breadth is coming from.   It shows Russell 2000 Small Cap iShares diverging badly from the S&P 500 Large Cap Index since early March.   As often happens, small caps led the market rally that lasted into early February.  But they also have a history of leading market declines.  A  lot of the weakness in smaller stocks may be tied to the March plunge in banking shares which are heavily represented in the IWM, and which remain weak.   Even with that caveat, the negative divergence in smaller stocks is worrisome.

SECTOR PERFORMANCE FAVORS DEFENSE...Chart 3 ranks S&P sector performance over the last month which is when most of the negative breadth divergences have appeared.   And it shows relative strength in defensive sectors like utilities, consumer staples, and health care.  At the same time, the two weakest sectors have been more economically-sensitive sectors like consumer discretionary and industrial stocks.   There again, the monthly sector    ranking suggests that investors remain in a generally defensive mood.