Chart of the Week
Momentum Indicator vs. SPY
Last week's Charting the Course carried the theme “A Tale of Two Tails,” our shorthand for a market where the outcomes from here look unusually binary. Our chart of the week puts our proprietary momentum indicator up against SPY, and the picture is one we have seen before: the indicator peaked in late June and has declined steadily since, while the market has pushed on to new highs. That widening gap between the two is the classic signature we have observed around prior market tops.
The historical examples are instructive. When the indicator rolled over in September 2021, the market followed roughly three months later. Before last year's spring selloff, the lead time was a little over two months. Looking across every instance of this divergence back to 2012, the average lead from indicator peak to market peak has been 66 calendar days. Measured from the June peak, that window opens in late August and runs into early September, which also happens to align with our volatility analog work.
We want to be clear about what this is and is not. It is not a countdown, and past lead times guarantee nothing about this one. What it is, in our view, is a well-defined window in which we are watching especially closely, with the market at highs, sentiment at multi-decade extremes, and our indicator still pointed lower. If the indicator bottoms and turns up from here, the bullish tail gets stronger. Until it does, we remain patient and treat this rally with a healthy dose of respect.