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Market timing is paramount for active investors for two reasons: First, when a market surges as it has recently, it can be challenging to resist the temptation to chase, enter at inflated prices, and suffer from potential losses during ordinary market pullbacks. Secondly, when riding a trend successfully, avoiding overconfidence is crucial. Markets can be unpredictable, reverse on a dime, and punish overconfident investors. As always, patience and disciplined decision-making are keys in such scenarios. Staying vigilant, periodically reassessing risk, and having exit strategies in place prevent over-committing to a trend that may not be sustainable. Furthermore, data and historical trends are better than relying on gut or anecdotal evidence alone. Below are eleven charts that suggest that the current rally may not be sustainable in the short term:
Chart #1: Downside Volume Near Record High Signals Warning Shot
A 90% downside volume day in the market signifies a day where 90% or more of the total trading volume is concentrated in stocks red for the session, indicating a substantial and broad-based sell-off. On Tuesday, Mark Ungewitter (@mark_ungewitter on X) observed that the NYSE suffered a 90% downside day within 3 sessions of recording a record high. Such a signal is rare, but it has market significant marked market tops the past four times it has occurred.
Image Source: SenimenTrader
Chart #2: Rate Cut Odds Plummet
A few months back, the market was pricing in a March interest rate cut. However, after Tuesday’s hotter-than-anticipated CPI reading, the Chicago Mercantile Exchange ((CME - Free Report) ) FedWatch Tool is now pricing in a ~90% chance rates will remain unchanged in March.
Image Source: Chicago Mercantile Exchange
Chart #3: Presidential Election Seasonality
Presidential election seasonality refers to the observed patterns and trends in stock prices during the lead-up to and aftermath of a presidential election. Historically, in a presidential election year, stocks retreat from February to March before gaining bullish momentum into year-end. Stocks are entering their historically weakest period of an election year now:
Image Source: Ryan Detrick, Carson Investment Research, FactSet
Chart #4: CNN Fear & Greed Index
The CNN Fear & Greed index combines various factors, including market volatility, breadth, put and call options, and other indicators, to generate a single composite score on a scale of 0 to 100. Over the past few years, fading sentiment extremes in the indicators have bode well for investors. The Fear & Greed Index currently sports an “Extreme Greed” reading.
Image Source: CNN
Chart #5: NASI Flashes “Bear” Signal
The McClellan Oscillator is a market breadth indicator designed to analyze the advancing and declining issues in the stock market. The faster moving average recently crossed below the slower moving average, signaling a bear cross. Historically, there are very few signals, but when there is one, they tend to be meaningful.
Image Source: StockCharts.com
Chart #6: Volatility Seasonality
Over the next month, the Volatility Index (VIX) has historically averaged a sharp rise. After such a bullish trend in equities, a pick-up in volatility would not be surprising and would shake out “weak hands.”
Image Source: Equity Clock
Chart #7: “Hindenburg Omen” Signal Flashes
SentimentTrader (@SentimenTrader on X) identified a rare Nasdaq “Hindenburg Omen” signal. From the SentimenTrader website, the signal is explained as, “The Hindenburg Omen is a technical warning sign that was created by James Miekka in the 1990s, based on work from Norman Fosback in the 1970s. It monitors conditions that analysts have looked at throughout history as signifying potential weakness underlying the market. For this particular signal, we use three criteria, which likely differ from other sources: 1) The Nasdaq 100 is above its 50-day moving average, 2) Both new 52-week lows and 52-week highs on the Nasdaq are greater than 2.8% of all advancing and declining issues, and 3) The Nasdaq McClellan Oscillator is negative. When the signal triggers, it highlights a "split" market, which is unhealthy. Multiple signals in a cluster is a worrying sign. Traditionally, the signal is canceled after 30 days or if the Oscillator turns positive again, though we've seen that it can lead to market trouble several months in advance.”
Image Source: SentimenTrader
Chart #8: Bullish Moving Average Cross in TNX
An bullish treasury yield can be bearish for stocks due to its impact on borrowing costs and investor preferences. When treasury yields rise, it typically leads to higher interest rates across the financial system. Higher interest rates can increase borrowing costs for companies, potentially affecting their profitability and slowing down economic activity. The CBOE 10 YR Treasury Note Yield (TNX) recently broke out above its 50-day moving average:
Image Source: TradingView
Chart #9: NH-NL Momentum Swing?
NH-NL measures the net new highs in the NYSE versus net new lows. Ian McMillan of Adapitv (@the_chart_life on X) pointed out the “NH-NL (common stock only) went from a YTD high reading on Monday 2/12, to a net-negative reading on Tuesday 2/13.” Bull markets need net new highs to continue for a sustained bull market. Are we seeing cracks here?
Image Source: StockCharts.com
Chart #10: Active Investors are Fully Invested
The NAAIM Exposure Index, which represents the average exposure to U.S. Equity markets reported by the National Association of Active Investment Managers, remains stubbornly high at 93% exposure. In July 2023, NAAIM reached over 100% exposure, leading to a multi-month pullback in equities. Will history repeat itself?
Image Source: NAAIM
Chart #11: Market Leader Flashes Frothy Signal
The leaders of the day are often the best way to know where the market will go next. Years ago, the saying was,“So goes General Motors ((GM - Free Report) ), so goes the market.” Though the leaders have changed over the years, the sentiment remains unchanged. AI-related stocks such as Nvidia ((NVDA - Free Report) ),Microsoft ((MSFT - Free Report) ) and Super Micro Computer ((SMCI - Free Report) ) are the new true market leaders.SMCI is up some 846% over the past year. The stock is nearly 200% above its 200-day moving average – an extreme level. While such an extension does not necessarily mark an imminent top, stocks historically have a difficult time holding 200% or more above the 200-day.
Image Source: TradingView
Bottom Line
Anyone who has read my work over the past year knows I have been bullish. Though price remains firmly in an uptrend, I believe it is a valuable exercise to look at both sides of the market and keep an open mind. While I am not necessarily bearish, the risk-to-reward for bulls is simply not as favorable as it was back in October.
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Charting the Bear Case (11 Must-See Charts)
Market timing is paramount for active investors for two reasons: First, when a market surges as it has recently, it can be challenging to resist the temptation to chase, enter at inflated prices, and suffer from potential losses during ordinary market pullbacks. Secondly, when riding a trend successfully, avoiding overconfidence is crucial. Markets can be unpredictable, reverse on a dime, and punish overconfident investors. As always, patience and disciplined decision-making are keys in such scenarios. Staying vigilant, periodically reassessing risk, and having exit strategies in place prevent over-committing to a trend that may not be sustainable. Furthermore, data and historical trends are better than relying on gut or anecdotal evidence alone. Below are eleven charts that suggest that the current rally may not be sustainable in the short term:
Chart #1: Downside Volume Near Record High Signals Warning Shot
A 90% downside volume day in the market signifies a day where 90% or more of the total trading volume is concentrated in stocks red for the session, indicating a substantial and broad-based sell-off. On Tuesday, Mark Ungewitter (@mark_ungewitter on X) observed that the NYSE suffered a 90% downside day within 3 sessions of recording a record high. Such a signal is rare, but it has market significant marked market tops the past four times it has occurred.
Image Source: SenimenTrader
Chart #2: Rate Cut Odds Plummet
A few months back, the market was pricing in a March interest rate cut. However, after Tuesday’s hotter-than-anticipated CPI reading, the Chicago Mercantile Exchange ((CME - Free Report) ) FedWatch Tool is now pricing in a ~90% chance rates will remain unchanged in March.
Image Source: Chicago Mercantile Exchange
Chart #3: Presidential Election Seasonality
Presidential election seasonality refers to the observed patterns and trends in stock prices during the lead-up to and aftermath of a presidential election. Historically, in a presidential election year, stocks retreat from February to March before gaining bullish momentum into year-end. Stocks are entering their historically weakest period of an election year now:
Image Source: Ryan Detrick, Carson Investment Research, FactSet
Chart #4: CNN Fear & Greed Index
The CNN Fear & Greed index combines various factors, including market volatility, breadth, put and call options, and other indicators, to generate a single composite score on a scale of 0 to 100. Over the past few years, fading sentiment extremes in the indicators have bode well for investors. The Fear & Greed Index currently sports an “Extreme Greed” reading.
Image Source: CNN
Chart #5: NASI Flashes “Bear” Signal
The McClellan Oscillator is a market breadth indicator designed to analyze the advancing and declining issues in the stock market. The faster moving average recently crossed below the slower moving average, signaling a bear cross. Historically, there are very few signals, but when there is one, they tend to be meaningful.
Image Source: StockCharts.com
Chart #6: Volatility Seasonality
Over the next month, the Volatility Index (VIX) has historically averaged a sharp rise. After such a bullish trend in equities, a pick-up in volatility would not be surprising and would shake out “weak hands.”
Image Source: Equity Clock
Chart #7: “Hindenburg Omen” Signal Flashes
SentimentTrader (@SentimenTrader on X) identified a rare Nasdaq “Hindenburg Omen” signal. From the SentimenTrader website, the signal is explained as, “The Hindenburg Omen is a technical warning sign that was created by James Miekka in the 1990s, based on work from Norman Fosback in the 1970s. It monitors conditions that analysts have looked at throughout history as signifying potential weakness underlying the market. For this particular signal, we use three criteria, which likely differ from other sources: 1) The Nasdaq 100 is above its 50-day moving average, 2) Both new 52-week lows and 52-week highs on the Nasdaq are greater than 2.8% of all advancing and declining issues, and 3) The Nasdaq McClellan Oscillator is negative. When the signal triggers, it highlights a "split" market, which is unhealthy. Multiple signals in a cluster is a worrying sign. Traditionally, the signal is canceled after 30 days or if the Oscillator turns positive again, though we've seen that it can lead to market trouble several months in advance.”
Image Source: SentimenTrader
Chart #8: Bullish Moving Average Cross in TNX
An bullish treasury yield can be bearish for stocks due to its impact on borrowing costs and investor preferences. When treasury yields rise, it typically leads to higher interest rates across the financial system. Higher interest rates can increase borrowing costs for companies, potentially affecting their profitability and slowing down economic activity. The CBOE 10 YR Treasury Note Yield (TNX) recently broke out above its 50-day moving average:
Image Source: TradingView
Chart #9: NH-NL Momentum Swing?
NH-NL measures the net new highs in the NYSE versus net new lows. Ian McMillan of Adapitv (@the_chart_life on X) pointed out the “NH-NL (common stock only) went from a YTD high reading on Monday 2/12, to a net-negative reading on Tuesday 2/13.” Bull markets need net new highs to continue for a sustained bull market. Are we seeing cracks here?
Image Source: StockCharts.com
Chart #10: Active Investors are Fully Invested
The NAAIM Exposure Index, which represents the average exposure to U.S. Equity markets reported by the National Association of Active Investment Managers, remains stubbornly high at 93% exposure. In July 2023, NAAIM reached over 100% exposure, leading to a multi-month pullback in equities. Will history repeat itself?
Image Source: NAAIM
Chart #11: Market Leader Flashes Frothy Signal
The leaders of the day are often the best way to know where the market will go next. Years ago, the saying was,“So goes General Motors ((GM - Free Report) ), so goes the market.” Though the leaders have changed over the years, the sentiment remains unchanged. AI-related stocks such as Nvidia ((NVDA - Free Report) ), Microsoft ((MSFT - Free Report) ) and Super Micro Computer ((SMCI - Free Report) ) are the new true market leaders.SMCI is up some 846% over the past year. The stock is nearly 200% above its 200-day moving average – an extreme level. While such an extension does not necessarily mark an imminent top, stocks historically have a difficult time holding 200% or more above the 200-day.
Image Source: TradingView
Bottom Line
Anyone who has read my work over the past year knows I have been bullish. Though price remains firmly in an uptrend, I believe it is a valuable exercise to look at both sides of the market and keep an open mind. While I am not necessarily bearish, the risk-to-reward for bulls is simply not as favorable as it was back in October.