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Let's look at the negative divergences from Tuesday and what they're telling us.

By HELENE MEISLER

Jun 23, 2021 | 06:00 AM EDT

When it comes to markets, I am often a chronic complainer.

But in the last few months, there hasn't been much to complain about. In a sideways market we've just been trying to play the swings and the rotating groups. And while there have been some minor negative divergences there have been very few that were glaring.

Tuesday's divergences, however, were quite glaring.

Before I get to the divergences, let me note just over a month ago I warmed up to tech and growth stocks. I had a variety of reasons, but some were the negativity toward them (the National Association of Active Investment Managers Exposure was at 44 you might recall), the positive divergence of fewer new lows, and interest rates. Now that tech has rallied so strongly in June, it has gathered quite a few more friends. Folks who were negative in May are now positive and that list is growing. Earlier in the week, I said I thought this week's NAAIM Exposure would likely go down from the current 98.5, but now I believe we could see an uptick. Either way, there has been a vast sentiment shift.

So let's talk about the number of stocks making new highs on Nasdaq with that new all-time high, because I am unimpressed with 124 new highs. Heck, a few weeks ago there were almost 300 and back in March there were 500 (there were 700 new highs in February but that was extreme). The index movers are doing all the heavy lifting.

The number of stocks making new highs on the New York Stock Exchange is not impressive, either. The peak at just over 700 in May has not come close again, but with the S&P a mere fraction away from a new high, we are not even over 150 new highs; a few weeks ago there were 400-plus.

Breadth was terrible on Tuesday. We have not had such a glaring divergence in quite some time. The blue line is breadth and you can see it has quite a way to go to make a new high whereas the S&P (brown line) is on the verge.

The McClellan Summation Index is heading down. It would need a net differential of positive 1,500 advancers minus decliners on the NYSE to stop going down and turn up. Here, I show it with the Russell 2000, but the direction is still down, as it has been since mid-June.

To get back to Nasdaq, I noted yesterday that I think we're getting nearer to the end of the move in bonds and I suspect we will see bonds peak (rates bottom) in the next few weeks (the inverse of February/March) and we know the rate move has been supportive of growth/tech stocks. Yet now take a look at the SOX, which has lagged this week.

When we look at the SOX relative to Nasdaq, it's not a good look right here. At point A last summer Nasdaq was on that last rip higher, while the semis on a relative basis were near lows. A similar thing happened at point B in February. And now the SOX relative to Nasdaq has been heading down since early June.

The only time the SOX acted poorly relative to Nasdaq and it didn't matter one iota in the past year was in December 2020. That's the blue arrow.

I do think Nasdaq has some time on its hands in terms of not being overbought yet, but I think that time runs out somewhere in early July, which is only just over a week away now. The Daily Sentiment Index (DSI) for Nasdaq is now at 83, so I hope you can see why I think the runway is getting shorter now.

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