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June 30, 2015, 3:16 p.m. EDT

Market sends a message: Cash is king

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About Kevin Marder

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is principal of Marder Investment Advisors Corp. and a contributor to The Gilmo Report. Previously, he served as chief market strategist for Ladenburg Thalmann Co. and developed institutional fixed-income risk management software for Capital Management Sciences.

/conga/trading-deck/bios/marder_kevin.html 173642
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By Kevin Marder

Monday's blowout, down 2.4% on the Nasdaq Composite and 2.1% on the S&P 500, only served to bring into the open what had been building beneath the surface of the averages: an unlikely divergence between two market segments.

At the same time, the damage to the Nasdaq in four days of losses undoes six weeks of gains. The market takes the stairs up and the elevator down. It also occurs as the index enters what has been its most difficult month of the year since 1990, on a median basis.

Technically, the Nasdaq's trend has turned neutral according to the chart below, which shows Monday's action taking out the two prior swing lows.

For a larger chart, please click here .

Chart created using TradeStation . ©TradeStation Technologies, 2001-2015. All rights reserved.

Typically, a bull market will lose momentum before it ultimately tops and rolls over into a bear market. It does this as the averages advance to new highs accompanied by fewer individual issues making new highs. This is called a breadth divergence, and is most often measured by comparing the blue-chip averages to the cumulative daily New York Stock Exchange advance/decline line.

As noted a week ago, " Breadth has not deteriorated to any great extent just yet. This effectively buys the market time before the expected narrowing becomes obvious ."

The chart below shows a divergence that began in mid-May between the NYSE a/d line (a proxy for the average stock) and the S&P 500. This divergence is too young to be considered a threat to the long-term bull. Still, it is noteworthy that the a/d line is trading at January levels, while the S&P is trading considerably higher than that.

For a larger chart, please click here .

Chart created using TradeStation . ©TradeStation Technologies, 2001-2015. All rights reserved.

Just recently there was another divergence, a sort of reverse divergence, in that the S&P did not confirm the Nasdaq's mid-June push to a new high. The S&P then was ahead of the Nasdaq on the way down by sliding through its 50-day moving average two days before the Nasdaq cut through its average.

These short-lived divergences are not the type that this column spends much time on, particularly when the small-capitalization sector has been outperforming for most of the past two months. However, 1) They can explain the short-term selling pressure felt by the large caps relative to the average stock, and more importantly, 2) any divergence counts, and should be followed.

As far as general market analysis, this column weights the action of the leading stocks above any other indicator, including divergence. And up until just recently, most leading stocks were not indicating anything was awry.

At this stage, however, there are very few shares setting up in the basing patterns that most often lead to upward revaluation.

Among the names, one of the only stocks forming a healthy basing pattern is Repligen /zigman2/quotes/210324360/composite RGEN -3.93% . This is a more-speculative biotech concern, though it has been profitable three years in a row. Most Wall Street seers eye 32% earnings growth this year and 42% growth next year.

/zigman2/quotes/210324360/composite
US : U.S.: Nasdaq
$ 142.00
-5.81 -3.93%
Volume: 632,962
Aug. 11, 2020 4:00p
P/E Ratio
243.82
Dividend Yield
N/A
Market Cap
$7.76 billion
Rev. per Employee
$354,073
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