Is a crisis lurking? 4 signals indicate that the bullish trend of the US stock market may soon reverse

According to the information from the Wise Finance APP, economist David Rosenberg believes that the rebound of the US stock market is facing risks due to four negative divergences that persist.

When stock prices rise while related technical indicators fall, unable to confirm the market's upward trend, negative divergences occur. In a bullish market, a rise in stock prices usually receives confirmation from a fundamental indicator.

"People believe that when major moving averages set new records, in a strong market background, many risk-taking indicators will confirm this trend. The recent situation is clearly not the case," Rosenberg said in a recent report.

The S&P 500 index has risen by 25% since its low point in late October. If Rosenberg's prediction comes true, a considerable amount of gains may be erased.

Rosenberg warned, "The longer these indicators fail to confirm the rise in prices, the more fragile the major moving averages become, and the higher the risk of a reversal."

The following are the four technical divergences that Rosenberg is monitoring.

1. Dow Theory

Although the Dow Jones Industrial Average has set a new all-time high, the Dow Jones Transportation Average has not confirmed a broader uptrend with its own new high.

This technical indicator is very important. Generally, as industrial companies sell more goods and their stock prices rise, the companies responsible for transporting these goods should also benefit, but this has not happened yet.

Rosenberg said, "The longer this trend remains unconfirmed, the greater the accumulated level of danger."

2. High-Yield Bonds

As the stock market repeatedly hits new highs, a risk indicator that should rise in sync is the performance of high-risk high-yield bonds relative to US Treasuries. However, this has not occurred. Since the stock market bottomed in October last year, long-term Treasuries have outperformed high-yield bonds.

3. Technology Stocks

Despite technology stocks continuously setting new highs, in the past two months, the performance of technology stocks relative to the overall market has been fluctuating sideways. This indicates that the upward trend of technology stocks may be nearing its end, and for the stock market to maintain its current level, other sectors of the market must take the lead Rosenberg said, "These stocks used to be the most important stocks in the market, but now it seems that they are no longer under market control."

4. High Beta Stocks

If the stock market hits new highs, high-risk stocks with high beta coefficients typically outperform low-risk stocks. However, since the beginning of 2024, this has not been the case. Instead, the relative performance of high-risk stocks has been fluctuating sideways compared to low-risk stocks.

Rosenberg said, "We believe that the recent momentum can continue in the short term, but there are increasing uncertain factors warning about the future upside potential."