Below is a great blog post from Chris Kimble that highlights the divergence in equal and market capitalization indexes. This shows how a few big cap stocks (think FANG stocks) that have performed well are propping up the indices. The equal weighted indexes are under-performing the cap weighted indexes by a whopping 25%. We also see this divergence in our own breadth indicators. One simple one we follow is the amount of stocks trading above the 20 and 50 day moving averages. The second chart shows how momentum has peaked prior to price displaying a negative divergence. This usually is resolved to the upside but we can see typically when momentum fades this tends to lead to a level of consolidation or pullback before breadth picks up and momentum resumes.
The S&P remains overbought and with momentum fading we could be in for some short term weakness as the market digests the recent gains. However, as earnings season had been favorable to equities and with the potential for tax reform this should keep a bid in the market. Coupled with correlations at multi-year lows this sets up nicely for an active manager assuming you are positioned in the right areas, as we think the strong will get stronger and the weak performers will be under tax selling till year end.