Magnificent Seven Divergence Suggests New Indicators to Watch
Where is the money flowing to? Let's take a look at some new indicators that can be helpful as the Mag 7 no longer acts as a block.
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Here’s a spoiler: Friday’s action did not change a thing in terms of the indicators. But the action of the last few weeks—this incessant chop—has put a few things on my radar that weren’t there before.
With the Mag 7 diverging and no longer acting as a block we finally see folks realizing it. Oh, I don’t quite think it is a Realization Day yet but there is a lot less chatter about how they are immune to (fill in the blank). I suppose that is what happens when they stop working, folks come up with reasons not to own all of them anymore.
But has the money flowed elsewhere? Yes and no. If we look at the McClellan Summation Index, which to me represents what the majority of stocks are doing, then the lack of flow into the Mega Caps has allowed some money to escape into the others, which is probably why, despite this now nearly three weeks of chop, the Summation Index hasn’t rolled over. Not yet.
Friday, it stopped going up, so that is now high on my watch list: will this be a rest or will it roll over?
I also think it has somewhat—not fully—changed something in options trading. The last week did not see one day of equity put/call ratio readings under .50. And in the last twelve trading days—pretty much since the chop started—we’ve only seen it slip under .50 once.
When people stop making money, they change their habits—that’s sentiment. So take a look at the five-day moving average of the equity put/call ratio. It went from under .50 in mid to late January and now has made a higher low and is at (almost) .54. So I am watching to see if this trend continues: are those options traders really and truly going to stop their speculation?
With the advent of the Mag 7 slimming down to two, I see everyone on television recommending financials. I find that amusing that the Bank Index has doubled since the October 2023 bottom and now it’s as though a lightning bolt hit these folks, now they see a reason to like the banks/financials.
Long-time readers will know that I have always been a fan of watching the Bank Index relative to the S&P. It, too, has been in an uptrend since that October 2023 low. It is now toying with the November high.
But now, I have put a new ratio on my radar: the Bank Index relative to the QQQs. I mean, if banks are going to outperform the mega-cap tech stocks, as they have since mid-December, then this blue line is going to be crossed. So far, it has not been.
Banks look overbought to me right here so this ratio ought to be a good picture of the appetite for banks over tech. As a reminder, the QQQs have no financials.
