The markets closed another week at record highs, with the S&P 500 up by 2.3%, the Nasdaq by 3%, and the Dow by 2%. [...] I want to share two charts that caught my attention: The first chart, courtesy of Sentimentrader, depicts the small speculator index at the bottom. The annotation succinctly captures the essence of the chart— "small speculators are all in."
Small speculators are all-in.
This mirrors my observation last week regarding fund managers being fully invested based on the NAAIM index. The alignment between market participants, both large and small, underscores the pervasive euphoria across the market.
Tech leadership vs S&P 500 is at highs exceeding the Great Financial Crisis.
The second chart, from Bank of America Global Research, highlights the Technology leadership versus the S&P 500, reaching levels surpassing those seen before the Great Financial Crisis. This serves as an intriguing backdrop to maintain awareness as sentiment and positioning continue to stretch.
The S&P 500 stands as the final major index to surpass its all-time highs. The remaining horizontal line linked to price history is at 4818—the intraday all-time high recorded two years ago on January 4, 2022. Currently, the S&P 500 maintains robust health. In the chart’s lower panel is my preferred gauge of market breadth, Net New Highs. This metric reports the number of stocks reaching new highs versus those making new lows across the NYSE and Nasdaq markets. This measure of breadth has remains consistently positive during the best market rallies.
Given the prevailing positive sentiment across markets, stemming from the widespread advance since November, I speculate the likelihood of a healthy correction as the next probable move. To assess this, I will closely monitor market breadth, utilizing it as a key factor in evaluating the probabilities of whether the anticipated correction is likely to be healthy or potentially more severe.
A mere two
weeks ago, the S&P 500 ETF SPY experienced its largest inflow ever.
This encapsulates the current state of the S&P 500—a market
teetering on the brink of all-time highs, with both retail and
professional market participants joining with unwavering enthusiasm— the
metaphorical “everyone is in the pool” moment.
The leading observation for my initial 2024 thoughts that the market is ripe for a healthy correction is the condition of market sentiment, and equity exposure. For over a month now the CNN Fear & Greed Index has reported a market operating in greed, Extreme Greed for the last two weeks.
The NAAIM Exposure Index measures US equity exposure among active fund
managers reported the highest reading for the year, the highest since
November 2021. (The Nasdaq peaked in November 2021, and the S&P 500
just over a month later in January 2022).
The following chart of the S&P 500 marks the relative peaks
in sentiment and equity exposure using the CNN Fear & Greed Index
(marked by red arrows) and the NAAIM Exposure Index (marked by blue
arrows). It is a clear observation that the combination of excessive
greed and elevated equity exposure have preceded all meaningful declines
since the 2022 peak. I do not think it will be different this time.
To end last week’s note I summarized this chart as presenting a compelling argument for selling into greed— I still feel this way. Momentum
has propelled the market through the year, however this is recently
being subtly being interrupted. In the lower panel of the chart is the
Percentage Price Oscillator. This oscillator offers a quick insight into
trend momentum. The red dots within the panel signify negative
crossover events, a slowdown in momentum.
In
my analysis, momentum interruption occurs when the initial negative
crossover is not succeeded by a corrective price move. Instead, price
continues to climb with successive negative crossovers, creating a
pattern of interruptions. Based on my observations, the decline that follows such an interruption cycle tends to erase most of the earlier advance.
The previous instances of momentum interruptions in August 2021
and July 2022 exhibit an intriguing resemblance to the current
scenario, with the index rallying approximately 5% as momentum
decelerated. In both cases, the subsequent decline erased most of the
earlier advance. A comparable outcome today would potentially bring the index down to 4550. In
my analysis the immediate term has the signals flashing caution towards
a 5% decline. If this scenario unfolds, the speculated decline will
initially be favored as being one of health that sets the index up for
an additional leg higher. I speculate the correction will have the S&P 500 trade between 4500 - 4600 in the near term. Should this unfold, it will initially provide a healthy technical appearance where price revisits the breakout area.
Any grade-school pupil can tell you when the seasons begin. In the northern hemisphere, generally, spring begins March 21, while summer begins June 21. Autumn begins September 23, and winter begins December 21. Actual dates may vary by one day in a particular year. So step one is simple.
The physical reason behind the seasonal cycle is the tilt of the Earth's axis. The 23.5-degree tilt of the Earth's axis causes more direct heating of the northern hemisphere in the summer, when the Earth tilts toward the sun. It causes less heating in the winter, when the Earth tilts away from the sun. This change in heating and cooling causes the seasonal weather patterns that we are familiar with.
Charged particles from the sun form a teardrop-shaped envelope about the globe called the magnetosphere.
Not so well known is the effect of the seasonal variation on the Earth's geomagnetic field. As the sun emits energy, charged particles flow outward, carried by the solar wind. As these particles sweep past Earth, they form a teardrop-shaped envelope around the globe called the magnetosphere.
There is a seasonal variation in two important parts of the magnetosphere. When the Earth tilts toward the sun in the summer, the charged particles can more directly flow into the north pole, where they affect the Earth's magnetic field. This effect is lessened when the Earth tilts away from the sun in the winter.
The second magnetic effect is on the magneto-tail, that part of the magnetosphere which streams away from the sunny side of the Earth. As the Earth tilts toward the sun, this tail "rides higher." As the Earth tilts away from the sun, the tail "rides lower." This affects how our moon, which moves in and out of the magnetosphere, interacts with the Earth's magnetic field.
Australian Government Bureau of Meteorology (2023): The Seasonal Distribution of Geomagnetic Disturbances.
So what does this have to do with stocks and commodities? Scientific evidence suggests that these fluctuations in the Earth's magnetic field affect humans. Studies show that magnetic field changes are linked to blood PH changes, which in turn cause mood swings. Perhaps the psychological mood swings of traders are also subject to these magnetic field changes.
More obviously, the seasonal cycle could be expected to affect crop prices, such as those of wheat, corn and other commodities. Similarly, with most businesses running on a quarterly profit cycle, seasonal variations in the buying and selling of materials and equipment can be expected. Thus, on both a fundamental and technical basis, a trader can expect season price variations in stocks and commodities.
To perform step 2, mark the dates of the cycle on a chart with solid dots, and place them above or below the price as you estimate that price is high or low relative to what it was approximately one-fourth cycle earlier. Points do not necessarily have to alternate between high and low.
Now look for cycle "inversions." If two lows or highs occur in succession, the cycle has "inverted" between the points. A normal inversion point is halfway through the cycle.
Quoted from: Hans Hannula (1991) - The Seasonal Cycle. In: Stocks & Commodities V. 9:11 (458-460).
The S&P 500 touched the lower regression channel again. While plenty of room remains to the downside, the CNN Fear & Greed Index indicates "extreme fear". Time to buy? No. Sell bounce next week (HERE) again around Apr 03 (Tue).
While everybody and his brother are expecting the Everything-Bubble to pop soon, some are touting the stock markets would plunge into an epic abyss. Martin Armstrong explains again why this time it really is different (HERE)
No doubt, greed is historically excessive in the US-stock market these days (HERE), and a correction is due. At the same time there is a quite different technical perspective to it: It took the Value Line Geometric Composite Index (though not inflation adjusted, but equally weighted, using a geometric average) three attempts and 19 years to finally break significantly above the 1998 high. However, also since 1998, countless Perma-Bears among the Elliott-Wavers are still constantly expecting THE epic stock market crash to be lurking around every corner. They expect the completely distorted major US-stock indices to dive to and below their 1987 crash-lows (the wave 4 of lesser degree-target in Elliott Wave-lingo), and this event to usher in the end of civilization and the ascension of a new dark age. Well, the Value Line Index indeed had crashed below its 1987 low in 2009 already, and keeps rising ever since. The highs of 1998, 2007, 2015 and 2017 are now providing very strong support.
Dow Jones Industrial Average to Gold Price Ratio (in USD) │ Jan 1915 - Oct 2017 Source: macrotrends
US Equity Market P/E Ratio vs Long‐Term Historical Average Source: PCA
The 3-Day Moving Average of the CBOE Equity Put/Call Ratio at 0.57 and turning higher, signals the S&P 500 is overbought.
An insider is any officer, director or owner of 10% or more of a class of a company's securities. In most cases, an insider must report any trade to the SEC within two business days. The tables highlight companies that filed with the SEC through last Wednesday. More HERE
At 0.79 the CBOE Equity Put/Call Ratio signals moderate fear. However, this could be a corrective pattern in the SPX, and some sort of a market low close-by. March 23 (Thu) is a Cosmic Cluster Day (HERE); March 24 (Fri) a SoLunar turn-day (HERE).
On Wednesday, Dec. 7th the CBOE Equity Put / Call Ratio closed at 0.46, signalling extreme greed. In fact this is the lowest Put/Call Ratio value since June 10th, 2015. On June 11th the SPX turned down.
CNN's Fear & Greed Index signals a market high is near or in. Source: CNN Fear & Greed Index
Jesse Felder (Jul 30, 2016 @ Zero Hedge) - Over the past half-century, we have never seen a decline in earnings of this magnitude without at least a 20% fall in stock prices, a hurdle many use to define a bear market. In other words, buying the new highs in the S&P 500 today means you believe “this time is different.” It could turn out that way but history shows that sort of thinking to be very dangerous to your financial well-being.
On July 29 CNN's Fear & Greed Index indicated "Extreme Greed" Source: CNN Fear & Greed Index
Citigroup's Panic/Euphoria Model on August 01, 2016 = Most 'euphoric' since August 2015. Source: Citigroup Panic/Euphoria Model
The VIX should turn up today, meaning the SPX turning sideways-to-down into Jul 20 (Wed). The next lows in the VIX (= highs in the SPX) are likely Jul 14 (Thu), Jul 28 (Thu), and Aug 16 (Tue). Source: CBOE
FFC Long Range Forecasts rely exclusively on Artificial Intelligence and Machine Learning to analyze and model. Source: Financial Forecast Center, LLC.
90% of the stocks in the S&P 500 are now above the 20 Day Moving Average.
June 21 (Tue) formed a narrow range inside bar - usually a trend continuation pattern (HERE). Oscar Carboni sees a Bull Pennant Flag on the daily ES (HERE).
The daily range was the narrowest of the last 8 trading days (HERE), and volume contracted. Today a breakout of yesterday's range is likely. However, Brexit-Thursday (Jun 23) is the nextsolunar turn-day, and the market may just wait for that.
