Can Divergences Tell You When to Stick a Fork in the Stock Market?
Former New York Yankee great Yogi Berra is also legendary for his famous logic-defying quotations, including such gems as, “When you come to a fork in the road, take it,” which became the title of a 2001 book of “Inspiration and Wisdom” from the holder of 10 World Series rings. But if your playing field is the stock market, can the advice of the 15-time all-star and 3-time MVP, who recently turned 81, help you catch the next major move? A mere glance at the latest averages reveals a stock market rife with divergences. The venerable Dow Jones Industrials climbed to a 6-year high of 11642.65 on May 10, 2006, a stone’s throw from the record close of 11722.98 on January 14, 2000, before getting knocked off their lofty perch by the usual suspects (fears of inflation and rising interest rates). Meanwhile, indices of smaller or more economically sensitive stocks had regularly hit records for months, riding the coattails of a booming global economy. Going into the 4th of July, the Dow Jones Transportation Average had rebounded to stand less than half a percent off its high just under the 5000 level. And the Dow had erased most of an 8 sell-off to climb back within 500 points of its record. You wouldn’t know it, though, by looking at various measures of large-capitalization stocks dragged lower by a heavy weighting in technology and telecom shares after their historic peaks in early 2000. The benchmark S
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