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Propriatary Indicator: Consolidation over. Short-term Risk On but last leg caution.

At the start of the year, we shared our Smart Trader indicating that profit taking was likely going to take place. A month later we see that indeed it happened. However, markets were strong and instead of a sell-off correction, we had a sideways correction instead.

Our indicator momentums has flipped but both remain on the "overbought" side.

This means that buying momentum has started again.

How do we read this?

It's risk on, but be cautious because the next consolidation is shaping up to be bigger:

  1. We are not "cheap" as dumb money is extremely optimistic. The odds of making money over the next 2 months is negative at these levels. However, in extremely bullish markets, dumb money levels can stay at optimistic levels for months (like June to July 2023). So, the trend should be considered up until sharp selloffs and other coincident indicators hit.

2. A quick intermarket analysis shows hints of possible weakness.

The 10-year yield ($TNX) and the $USD have been rising during the SPX consolidation and rise.

Usually, when both bond yield and USD is rising, it's a drag on stocks.

The Bullish Percent NYA is a breath indicator. Usually, when the SPX goes up, so does the breadth. This time, you can see that as the S&P500 was rising, breadth was falling.

All three are going in directions that correlate to weakness in the broad markets.In

Taken together,

The short term direction of traders is RISK ON, however, the divergences of the intermarket analysis and the already high levels of dumb money sentiment reinforce that gains will be limited and we should be vigilent going forward as powder for a bigger pullback is accumulating. In other words, when dumb money so optimistic, BE ON THE LOOKOUT for reasons to take profit, and think twice about buying aggressively.

Of course, there is a chance that $TNX and $USD and breadth may all reverse into bullishness, we will reconsider the picture again if that happens.

As it stands now, we are of the view that 2024 is a bullish year, but probabilities stand that somewhere in 1H will see a proper pullback and more of a recovery towards 2H. We will use our Smart Trader indicator when to risk off again.

Investors wouldn't be faulted for thinking of taking profit of stocks that have already surged too much and show signs of exhaustion (but might want to wait for the appearance of some structural risks to become evident first). Laggards with good valuation and clear earnings guidances may do still do relatively well in this environment, especially if they have high dividend yields at current prices.

NOTE: When the proprietary indicator momentum flips the way it did now, it's not a clear signal anymore. However, as we mentioned before, when you get a good signal, it works very well as a major market timing tool. (When the black cuts downward through the red above zero = Risk On. When the black cuts upward through the red below zero = Risk off. But for instance, if the black cuts downward through the red but below the zero level, it means RISK ON because of short term momentum but likely most of the easy gains have been taken because closer to overbought.

Take care!

For educational purposes only. The signals posted does not prescribe any trading decisions. Consult a financial advisor before initiating any investment or trading decisions.


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