Trader Talk

Divergent stock market trends: What do they mean?

Trader on the floor of the New York Stock Exchange.
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Divergent market trends: Weakness in small- and mid-caps and "new tech," and strength in emerging markets.

Market weakness is now evident in several key sectors. While the is down fractionally as we approach the end of the month, we are seeing notable weakness in other sectors:

What's up with those names? As Bill Miller pointed out on our air today, when growth is in short supply, traders will pay up for any stocks that have growth. But if there is a perceptionthat growth is picking up, then traders will try to rotate out of those high-priced growth names.

Remember the big trade at the start of the year: Short emerging markets, go long "new" tech.

That trend has now reversed: The main emerging markets ETF (EEM) is not up six days in a row and has broken out to the highest level since the beginning of the year.

The criticism of EEM is it is weighted toward a small basket of countries like China and Brazil that are largely dependent on commodities. It's true China and Brazil have been rallying strongly in the last six days, China on hopes of additional stimulus: China (FXI) +6%, Brazil (EWZ) +8%.

But other emerging market countries in the past six days have also been strong:

  • Turkey (TUR): +7.5%
  • Chile (ECH): +5.8%
  • India (INDY): +4.9%
  • Mexico (EWW): +4.2%

These countries are not so dependent on commodities. Mexico has had a strong move off the bottom, as has Chile.

Elsewhere: What's up with the close? It's the most widely discussed topic among active traders: The weak close. Many days in March we have started strong, but weakened mid-morning, often after 10 a.m. ET.

Traders have been grousing about this for a couple weeks, but this morning Paul Hickey at Bespoke finally put a little more flesh on the bones.

His recommendation: Buy low and sell high by buying the close and selling the open. "Buying the close every night and selling at the open the next morning led to an outperformance of 2.25% versus buying the close and selling at the close each day," Paul wrote.

But you can do even better if you sold at 10 a.m. ET, producing returns of 4.98 percent higher than buy and hold.

Paul is smart enough to know that this pattern does not last forever. It works until it doesn't work.

Why is it happening? Maybe it's people in Europe selling out of the U.S. and buying emerging markets. Maybe a lot of people just stop trading in the middle of the day.