Bulls “Rush In” With More Stimulus On The Way

Over the last several weeks, we have repeatedly discussed the “money flow” sell signal that suggested “weakness” in prices. Such was a point we reiterated in last weekend’s newsletter:

“Currently, the money flows remain positive, but ‘sell signals’ are firmly intact. Such suggests downward pressure on prices currently. We do expect that market will likely muster a short-term oversold rally next week. However, the risk of a continued correction in March is likely if money flows deteriorate further.”

Well, the markets did indeed rally as Congress passed the mammoth $1.9 trillion “pork fest” stimulus package. While this bill is nowhere close to being reformative, as touted by the Democrats, it does inject a lot of capital into the economic system. Given that the Federal Reserve will have to monetize the bill’s entirety, it is not surprising the markets get a lift.

In our recent 3-Minutes On Markets & Money video, we discussed the triggering of the short-term buy signal.” 

The good news is the rally took the S&P back to all-time highs reducing concerns about a more significant decline in the near term. However, with money flows still trending negatively, we may see some recent advance consolidation next week. Such is consistent with the previous breakouts we have seen over the last several months where money flows were trending negatively.

Unfortunately, as shown, the money flow signals do not distinguish between consolidations and corrections. Such makes risk management a crucial part of the portfolio management process.

A Brief Dichotomy

While the short-term indicators are undoubtedly positive, suggesting more upside near-term, the longer-term index remains on a confirmed sell signal. Such indicates that downward pressures may continue to limit upside now.

Such was the point made last week, which is worth reiterating:

“The dichotomy between the daily and weekly charts suggests we may well see a rally in the short-term, but another correction following. The last time we had the current setup with our indicators was in September and October of 2020, which provided two 10% corrections before the consolidation process was over.”

Chart updated through Friday

Currently, that seems to be the likely scenario. With valuations still extended, the recent correction didn’t reduce speculative fervor. Furthermore, prices remain well deviated above long-term means, particularly in the small and mid-cap space.

While more stimulus will likely support prices over the next few weeks, the threat of rising inflation and interest rates could undermine growth expectations. As we will discuss in our positioning update below, we did increase our exposures this week. However, we also continue to suggest some caution for now.

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