Adam Sarhan MarketWatch Quote: This stock selloff has everyone talking about ‘divergence’

Market WatchNEW YORK (MarketWatch) — Strategists have few pat answers to explain the carnage across U.S. stocks on Thursday, but it’s clear that concerns over divergences within and between markets is taking a toll on investor sentiment.

“I think its’ a confluence of catalysts occurring,” said Adam Sarhan, chief executive of Sarhan Capital, in a phone interview.

Investors are again growing uneasy over what will happen when the Federal Reserve withdraws quantitative easing, he said. Other pressures include long-standing but recently dormant geopolitical fears as well as internal divergences between suffering small-cap stocks and the broader market and technical factors, including the S&P 500 index’s fall through its 50-day moving average. See: Stock market live blog for a rundown of other potential catalysts cited by strategists.

The tone also wasn’t helped by remarks by Iraq’s prime minister, who warned of potential plots by Islamic State to launch terror attacks on subway systems in New York and Paris.

The Dow Jones Industrial Average DJIA, -1.37%  remains down more than 240 points, or 1.4%, at 16,968.49, while the S&P 500 SPX, -1.40%  has shed a similar amount percentage-wise to trade at 1,969.64. The Dow and S&P are suffering the biggest one-day declines since July 31. The Nasdaq Composite COMP, -1.77%  is off 1.8% at 4,473.80.

Gold, which has suffered a bruising September beat-down, initially jumped as buyers flocked to safe haves like the yellow metal. The December futures contract GCZ4, +0.37%  remains up $1.30, or 0.1%, at $1,220.80 an ounce.

“It is not clear what caused this sudden shock to the system, but it serves as a reminder about the dangers of complacency – especially for the bulls in the case of stocks and the bears in the case of precious metals,” said Fawad Razaqzada, technical analyst at Forex.com, in a research note.

That said, worries about “divergence” seem to be a consistent theme among investors and strategists.

Indeed, small-cap stocks, as measured by the Russell 2000 RUT, -1.50% have been hit hard, with the index down 4.5% for the year to date. A “death cross” pattern, which is formed when the 50-day moving average falls below the 200-day moving average, on the index’s daily technical chart has sparked debate among technical analysts over the index’s outlook.

“While small caps had previously led the stock-market rally, it’s normal for them to begin to lag as bull markets mature, Sarhan said, but it could point toward further overall weakness.”

“Now that they’re rolling over and lagging, that could be a canary in the coal mine that a big top is [potentially] forming in small-cap stocks,” he said. “If it starts forming in the S&P and Dow and Nasdaq, then you can have a more ominous picture develop for the short [and] intermediate term.”

Cantor Fitzgerald on Thursday turned bearish on stocks, with chief market strategist Peter Cecchini citing “divergences” as a factor in the call. Cecchini, who had previously flagged a divergence between price and market breadth, also noted a divergence between equity volatility and high-yield credit as well as the gap in performance between small caps and large-cap stocks.

Cechhini also worried about a “disconcerting disconnect” between slumping emerging markets, which are responding to expectations for higher interest rates, and declining inflationary expectations in the U.S.

”Divergences are like stress fractures, at some point the divergence reverts,” Cecchini said.

Source: http://www.marketwatch.com/story/why-this-stock-selloff-has-everyone-talking-about-divergence-2014-09-25

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