- The stock market's bull rally is at risk, according to economist David Rosenberg.
- Rosenberg highlighted four negative divergences that suggest a potential reversal in stocks.
- "The longer these indicators fail to confirm the broader move higher in prices, the more vulnerable the major averages become and the higher risk there is of a reversal," Rosenberg said.
The stock market's bull rally is at risk as four negative divergences linger, according to economist David Rosenberg.
A negative divergence occurs when stock prices rise while an underlying technical indicator falls, failing to confirm the broader move higher. During bullish markets, higher stock prices are typically confirmed by a confirmed rise in an underlying indicator.
"The thinking goes that when the major averages hit a new record, a strong market backdrop would see the move ratified across a number of risk-taking indicators. This certainly is not the case of late," Rosenberg said in a recent note.
With the S&P 500 up 25% since its late-October low, there could be a decent amount of gains to unwind if Rosenberg's prediction plays out.
"The longer these indicators fail to confirm the broader move higher in prices, the more vulnerable the major averages become and the higher risk there is of a reversal," Rosenberg warned.
These are the four technical divergences that Rosenberg is monitoring.
1. Dow Theory
While the Dow Jones Industrial Average has hit record highs, the Dow Jones Transportation Average has yet to confirm the broader move higher with new highs of its own.
This technical indicator is important because as industrial companies sell more goods and see their stock prices rise, the companies tasked with moving those goods should benefit in tandem. But that has yet to happen.
"The longer this move is not ratified, the more danger there is at the headline level," Rosenberg said.
2. High-yield bonds
As the stock market hits record highs, one risk-on indicator that should move higher in tandem is the outperformance of risky high-yield bonds relative to safe US Treasuries. But that has yet to happen. Since the stock market bottomed in October, long-term Treasury bonds have outperformed high-yield bonds.
3. Technology stocks
Technology stocks relative to the broader stock market have moved sideways over the past two months, even as tech stocks continue to hit new record highs. That suggests that the rally in tech could be nearing its end, and other areas of the stock market will have to pick up the slack if the market is to hold current levels.
"These were the most important stocks for the market, and no longer look to be in control," Rosenberg said.
4. High-beta stocks
If the stock market is making new highs, risky stocks with a high beta should outperform low-risk stocks, but since the start of 2024, that hasn't been the case. Instead, the relative outperformance of high-risk stocks compared to low-risk stocks has been moving sideways.
"We continue to note that recent momentum can always continue in the short-term, but a growing list of non-confirmations are beginning to raise a number of yellow flags in terms of how much more room there is to run," Rosenberg said.