Why We Have Seen Divergence in the US Indices and More Trading Lessons Using Volume
Divergence in US indices has caught attention recently. Major benchmarks move differently. Nasdaq surges on tech strength. Dow lags with industrial weakness. S&P 500 sits in between. This relational split reveals underlying market dynamics. Over the last few months, there has been a considerable divergence between the Nasdaq 100 and the two primary indices of the Dow Jones and the S&P 500. There is a reason for this which I explain before David takes over with more volume lessons on gold and oil as markets wait for the FOMC release due later.
What Causes Index Divergence
Divergence often signals shifting sentiment. Sector rotation plays a role—money flows from one group to another. Economic data or earnings drive it. Volume price analysis (VPA) uncovers the truth. High volume in leading indices shows conviction. Low volume in laggards warns of exhaustion.
VPA Lessons from Divergence
Volume price analysis teaches key lessons here. Watch for volume confirmation on index moves. Nasdaq highs on rising volume confirm strength. Dow new lows on low volume hint at potential reversal. Divergence between indices and volume spots weakness early.
Practical Trading Takeaways
Use divergence for intermarket edges. Strong Nasdaq with weak Dow favors tech longs or industrial shorts. Quantum indicators on NinjaTrader highlight this—Trend Monitor aligns trends, Accumulation/Distribution spots phases. Anna Coulling’s VPA approach turns relational splits into opportunities.
Divergence in US indices offers rich lessons. Volume price analysis reveals hidden intent. Quantum tools make spotting and trading it reliable. Apply VPA for clearer decisions in multi-index environments. Stay alert—markets are connected.
What Is Sector Rotation?
Sector rotation is an investment strategy. Traders or investors shift capital between stock market sectors. This is based on economic cycles. The goal: Capture outperformance in leading sectors while avoiding laggards.
Different sectors perform best at different cycle stages. By rotating allocations, you aim to beat broad market returns. It’s popular with ETF investors (e.g., XLK for tech, XLE for energy).
The Economic Cycle and Sector Performance
The economy moves in phases. Each favors certain sectors:
- Early Recovery (post-recession, rates low): Financials (XLF), Consumer Discretionary (XLY)—benefit from borrowing/spending.
- Full Expansion (growth peaks): Technology (XLK), Industrials (XLI)—innovation and capex thrive.
- Late Cycle (inflation rises, rates peak): Energy (XLE), Materials (XLB)—commodity demand strong.
- Recession (slowdown): Utilities (XLU), Healthcare (XLV), Consumer Staples (XLP)—defensive, stable demand.
Volume price analysis (VPA) can confirm rotation: High volume in leading sector stocks signals conviction.
How to Implement Sector Rotation
- Identify the Cycle: Use indicators like yield curve, PMI, unemployment.
- Measure Relative Strength: Compare sector ETFs (e.g., XLK vs. SPY). Strong relative performance = rotate in.
- Tools: Rotation charts (e.g., on TradingView), RRG (Relative Rotation Graphs).
- Execution: Buy outperforming sector ETFs. Rebalance quarterly or on signals.
Example: In late 2025 risk-off, rotate to defensives (utilities/healthcare) if volume supports.
Risks and Considerations
- Timing is hard—cycles shift unexpectedly.
- Transaction costs/taxes from frequent rotation.
- Overfitting past cycles.
It’s active management—works best with discipline. Combine with VPA for volume confirmation on sector moves.
For current rotation (as of Jan 2026), tech/energy often lead expansions, but check real-time data. Test strategies on historical charts first. Quantum-style relational tools can adapt this to forex/commodities too.