A dangerous divergence in the markets: the indicators are at the top... but the "army" is retreating!
"The narrow rally is getting narrower"... with these alarming words, one of the senior traders at Goldman Sachs summarizes what he sees as a first-class warning sign in the U.S. stock markets, which is clearly reflected in the attached chart.
What does this dangerous chart reveal?
We are currently witnessing a phenomenon known as "Negative Divergence", which is one of the strongest warning signals in technical analysis:
The general index continues to rise (blue and white candles): The main S&P 500 index, which includes the largest 500 U.S. companies, hovers near its all-time highs, giving an impression of strength and momentum.
But the market's foundation is eroding (red line): The red line in the chart measures the "market breadth", that is, the number of companies within the index trading above their 200-day average. As we can clearly see within the red circle, this line is collapsing sharply.
Analytical translation:
This means that the rise we see in the main index is no longer a healthy rise involving the majority of stocks. On the contrary, it is a "narrow rally" led by a handful of giant companies, while the majority of other companies (the "market army") have already begun to retreat and decline.
"The final stages of re-leveraging"
This divergence perfectly aligns with the warning from the Goldman Sachs trader, who sees us in the "final stages of the re-leveraging cycle", which is the period when companies and investors have reached peak borrowing and risk-taking to push prices higher.
Summary:
When a few leaders continue to advance while the entire army retreats, this is never a sign of strength; rather, it is an alarm that the market's foundation has become extremely fragile, and the likelihood of a sharp and violent correction increases significantly. It is a clear indication that what is happening beneath the surface is much more important than what appears in the headlines.