A few weeks ago we highlighted Nasdaq new highs as one of the things that had us concerned that this up trend is in the late stages (rather than a new long term up trend off the June lows). We like to watch several measures of market health to get a feel for where the S&P 500 Index or Nasdaq is headed next. Another sign that we could be near the end of this up trend is the rotation to value stocks that started in April of this year.
In the chart below we show Berkshire Hathaway (BRKB) as a proxy for value stocks compared to the S&P 500 Index (SPX). Notice that the small sell off in April and the subsequent rally in May created a divergence between BRKB and SPX. BRKB made new highs and SPX didn’t confirm. The next leg down in SPX created a decent size correction, however, BRKB diverged again by not making a lower low. This action showed money moving out of stocks in general (SPX) and into stocks that provide more safety (BRKB).
The subsequent rally out of the June lows for SPX was also beneficial for BRKB. It went on to new highs even as SPX has stalled just below recent highs. This is disconcerting because it means that people were still moving money into value stocks even as SPX recovered its losses. To us it is further evidence that market participants don’t believe this rally and are positioning themselves for a correction of a larger magnitude.
Over the next several weeks it will be important to watch the action of stocks that are traditionally considered defensive (or less risky in a down turn) to see if money continues to move to safety. This will be a clue that the bull market move out of the 2009 lows is coming to an end.