Divergence and Convergence
Divergence and Convergence strategies look at whether markets are moving in the same direction (convergence) or in different directions (divergence)
- Markets are deemed to be "healthy" when various components move along with each other (convergence)
- expect high returns with low volatility
- Markets are deemed to be "unhealthy" when various components are moving in different directions (divergence)
- can be viewed as a cautionary sign - trouble may be brewing - expect higher volatility and lower returns
Basic Definitions
Divergence = when two or more things move apart from each other
Convergence = when two or more things move closer to one another