Friday, May 15, 2015

Value Line and The Broad Equity Market In The U.S.

While the broad equity market in the U.S., represented by S&P 500 index, is still marching up, its geometric sister called Value Line Geometric Index ($XVG or XVG) has stalled since July 2014.

In the past such divergences have been an early indicator of the incoming problems. Please, look at the chart below:

For those unfamiliar with $XVG - this index tracks the median index move as if all stocks had an equal amount expressed in dollars invested in them. Simply put - all equities are equal (this index does not care whether Apple is bigger than e.g Ebay).

To make things more visible, below I am putting the detailed charts picturing three periods when divergences between XVG and S&P 500 occurred.

                                               1998 - 2000

The Internet bubble was catastrophic. But S&P 500 needed quite a long time (two years) to start its bear market since XVG topped in April 1998. What is more, S&P 500 went up 36% since XVG topped.


The last bear market in S&P 500 started just three months after a top made by XVG.

                                                  2014 - ?
XVG made its first top (in this ongoing bull market) in July 2014. Since that time S&P 500 has gone up 11%. The current divergence is still intact - XVG is struggling at its resistance while S&P 500 is still marching up. Please, look at the chart below:

Summary - looking at the history of divergences between XVG and S&P 500, today we have something similar to the late Internet bubble. Then the broad market was going up fueled by big internet companies. Today the broad market is fueled by the FED and other central banks all over the world. While this broad market is still going up, the warning signals are flashing.

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