I’ve written recently on the growing spread between top- and bottom-performing sectors within the U.S. economy. And also on the growing spread between top- and bottom-performing stock markets around the globe.
The fancy name for this trend is called “divergence.”
It just means that two things which often move together (like sectors in the U.S. economy)… are now moving apart. They’re diverging.
And while I first warned you of this divergent market condition back in July, when I said it was “a sign we’re in troubled waters,” I haven’t yet told you the full story.
Take a look at this chart…
On the left of this chart, I’ve plotted the average return of the S&P 500 during convergent market phases (in green) versus divergent market phases (in red).
When markets converge, they move together. Everything’s going up because the overall market is healthy, or down when it’s not! But when they diverge, that all breaks apart as investors become increasingly picky.
As you can see, bullish equity investors do quite well during convergent market phases. They can expect an average three-month return of 3%. But equities have averaged a negative three-month return during divergent market phases.
What’s more: volatility during divergent market phases is nearly twice as high as it is during convergent market phases. So not only are bullish investors facing negative returns, they’re exposed to wild, gut-wrenching price swings!
Like I said, I’m sharing this research with you today because we’re currently in a divergent market phase. In fact, we have been since late-July, when I issued that first warning.
But simply knowing this fact – that we’re currently in a divergent market phase – is immensely valuable. That’s because there are investment strategies that are designed to thrive in this environment.
As the chart above shows well, passive buy-and-hold investments in stocks is NOT a favorable strategy during this divergent market phase.
But active, short-term strategies generally do great in divergent market phases – particularly strategies that are designed to play both sides of the market… and diversify in asset classes outside stocks (via ETFs).
So, as I told attendees of our Irrational Economic Summit… this is truly a “trader’s market” – and both Cycle 9 Alert and Max Profit Alert are going to be better options than buy, hold, and hope!
Chief Investment Strategist, Dent Research