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The S&P 500 – SPY Divergence Was Not in Hindsight

Seasonality usually creeps into the markets in August and September, so we were concerned when the S&P 500 (SPY) failed to register this time as it printed a divergence with TICK. We rationalized the possibility of rotation versus distribution. We also discussed the likelihood that institutions would prefer a significant drawdown of at least 5% to give them a better cost basis to beat the S&P 500 into year-end bonuses.

“The whole secret to winning and losing in the stock market is to lose the least amount possible when you’re not right.” -William O’Neil

S&P 500 – SPY Divergence

What have we learned in the past few weeks? Note this is not in hindsight.

The S&P 500 (SPY) began its divergence with TICK cumulative into the September highs. As institutional selling outweighed institutional buying, by comparison, SPY continued to move higher. We started taking profits into strength at the same time. We also began to condense the number of open positions and further reduced our size (fewer shares) in remaining positions. We sought to minimize risk. 


SPY - Divergence


We also learned that by the time the trend line broke the second week of October, the SPY was (-3%) lower. While we did not completely avoid the resulting (-8%) drawdown to date, we did bank the majority of SPY profits made from the February lows (+14%).

Institutions will again start buying. We’ll see their tracks soon enough, once the fear has dissipated.

How will we know?

Just as TICK cumulative rose for the majority of 2018, and dropped most recently, we will once again see TICK cumulative rise. Until that happens, we will sit on cash and manage fewer positions. We will wait for institutions.

Futures are dramatically lower this morning. Risk off.

Join us during our LIVESTREAM broadcast during market hours. Watch, listen and trade from 9:20 AM to 4:15 PM Monday through Friday.

Happy Trading,


“There’s a difference between knowing and accepting. I think a lot of people know that the market corrects, I’m not sure many accept this fact. The name of the game is not avoiding losses, that’s unavoidable, you just want to contain it.” – Frank Zorilla

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