Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Everything Stock Market Rally Continues

Stock-Markets / Stock Market 2021 Feb 25, 2021 - 06:03 PM GMT

By: Troy_Bombardia

Stock-Markets

The market’s strong uptrend remains intact despite some lingering concerns about high valuations, extreme sentiment, and other overbought signals. Investors continue to pour into all markets (stocks, commodities, crypto etc.) with ever increasing liquidity.


Now let’s look at some bullish and bearish factors to get a balanced view of the markets.

Average momentum

The non-stop rally across almost all markets has pushed many indicators to extreme levels. Taking a 9 week RSI of a combination of stocks, commodities and treasury yields quickly shows that we are at one of the most overbought levels in history.

When this happened in the past, it was not a good sign for stocks or the 10-year treasury yield over the next year on most time frames.

However, this was a very bullish sign for commodities over the next year.

Strong Breadth

Breadth is incredibly strong around the world. The MSCI All Country World Index has more than 84% of stocks above their 200 day moving average.

Historically, such strong breadth led to more gains in the stock market over the next year.

Improving Economy

The recent surge in copper has caused the copper:gold ratio to spike. The 6 month percent change of this ratio is now close to 50%.

Such a large spike was only seen 5 other times and this was great for stocks over the next year.

Surging margin debt

U.S. margin debt soared in the past 10 months since March 2020. This kind of increase was only seen 4 other times since 1959.

Three of these cases in 1972, 2000 and 2007 led to a bear market with the exception of 1983, which marked the start of a -14.3% correction that lasted a year.

Fund flows

Fintwit has been captivated with the idea that there is a lot of money left on the sidelines that can push stocks higher because fund flows (e.g. SPY ETF) are not registering extremes. This argument is wrong because:

  1. There is always “more cash in the sidelines”, even at the peak of bubbles. There is no way to measure just how much cash there is left “on the sidelines” because “the sidelines” is a vague concept.
  2. Not everyone buys funds. This rally has been heavily pushed by traders that are gobbling up individual stocks.
  3. While fund flow indicators are extremely popular, there are a lot of nuances that traders don’t think.

One such nuance is related to SPY. A popular social media artist mentioned that the past 2 years saw crazy outflows from stocks. Crazy outflows = bullish for stocks. But as SentimenTrader pointed out, this is a mis-representation of the truth. Strong outflows from SPY were offset by inflows into other S&P 500 ETFs such as VOO and IVV. When we look at fund flows for these 3 ETFs, the aggregate is not screaming “CRAZY OUTFLOWS! PREPARE TO BUY STOCKS!”

In the past, such strong inflows into S&P 500 ETFs sometimes led to a pullback over the next 1-2 months:

If we look at fund flows into the 3 S&P ETFs and QQQ, DIA, and IWM, we can still see strong inflows:

Stock market sentiment

The S&P 500’s Daily Sentiment Index is quite elevated. In the past, this was a somewhat bearish signal for stocks.

Historically, this was a short term worry for stocks over the next 2 months.

Conclusion: market outlook

Here’s how I think about markets based on 3 different strategies & time frames.

  1. Long term investors should be highly defensive right now. Look for opportunities away from public equities where there is less long term risk.
  2. Medium term contrarian traders should go neither long nor short. Wait. Risk:reward doesn’t favor long positions right now, while shorting into a speculative rally can end in disaster.
  3. Short term trend-focused portfolios should continue to ride the bull trend because no one knows exactly when it will end.

My discretionary market outlook does not reflect how I trade the markets right now. I trade based on my trading algorithm that cuts through the noise of endless research, indicators and charts.

By Troy Bombardia

https://www.bullmarkets.co

Copyright 2021 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in