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 National Association of Active Investment Managers Exposure Index represents the two-week moving average exposure to U.S. equity markets reported by NAAIM members.
The NAAIM Exposure Index, with a reading of 95.58, indicates a strong bullish sentiment
among active investment managers, reflecting their high confidence in
the future trajectory of the stock market (published Feb 16, 2024).
S&P 500 and NAAIM Index above 97 (published Feb 15, 2024)
Active investment managers are notorious for buying equities at tops and selling them at bottoms, highlighting the difficulties they encounter in accurately timing the market and making lucrative investment choices.
Still up: The 3 Day, the 9 Day and the 18 Day cycles vs the S&P 500 Index.
Jeffrey A. Hirsch (Feb 16, 2024) - DJIA S&P 500 & NASDAQ are all up 7 of last 12 days after the Presidents’ Day, but long-term record remains weak. Since 1990, average performance ranges from –0.56% for NASDAQ to –0.28% for DJIA.
Sizable declines in the last 2 years have worsened the record.
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.
