Deteriorating market breadth flashed warning signs for the stock market once again. A signal from the currency market is adding weight to the warning: the Australian dollar versus the Japanese yen (AUD/JPY). AUD/JPY represents the divergence dragging on the stock market. AUD/JPY topped out from March to June, a period over which many individual stocks in the stock market also topped out. Subsequently, a 2-month downtrend has unfolded with only brief impacts to the bullish upward charge in the S&P 500. AUD/JPY last closed exactly where it started the year.
I write a lot about the importance of AUD/JPY to traders. Indeed, the direct correlation between AUD/JPY and the S&P 500 (SPY) has been as strong as ever since the pandemic. However, AUD/JPY and the S&P 500 parted ways starting in mid-June. The divergence has widened week after week ever since.
If AT50 (MMFI), the percentage of stocks trading above their respective 50-day moving averages (DMAs), were not already so low (34.5% at the time of writing), I would make a bearish call on the stock market. Instead, I recently downgraded my outlook to neutral. This downgrade from bullishness means I keep a shorter leash on bullish trades. Moreover, I am unenthusiastic about buying new longs except in very select and solid cases. An oversold reading on the stock market exits me from neutral and back to bullish. Oversold trading conditions occur when AT50 closes below 21%.
Be careful out there!
Full disclosure: short AUD/JPY