Market Hits All-Time Highs As Money Flows Peak

Over the last few week’s we discussed the ongoing “buy signals” suggesting the market could retest all-time highs. That occurred this week. However, as stated last week:

“The good news is that we did indeed get the rally we were expecting. The not-so-good news is that the rally already consumed a majority of the ‘buy signal.’ Such does not mean the market is about to correct; it does suggest that upside remains limited near term.”

As shown in the bottom panel, the RIA PRO “Money Flow” signal is now into overbought territory. While the markets could undoubtedly break out to new highs next week, the upside remains limited. Such is due to the weekly signal, which is very close to triggering. 

“Our more significant concern remains the weekly “sell signal.” Historically, these weekly signals typically denote periods of more significant volatility swings or corrections. The biggest correction risk comes when the daily and weekly signals align.”

I will lay out the case for a summer “sell-off” momentarily, but let me recap what these signals do and don’t mean.

Technical Analysis In A Mania

On Friday, I received an email asking an essential question:

“I  enjoyed your piece this week on Sell Signals Are Useless In A Mania. I am starting to believe the Fed has achieved a ‘Permanently High Plateau’ for asset prices because there seems to be nothing to derail the endless risk appetite for any asset. However, in the futile exercise of trying to stay disciplined I don’t want to abandon valuations and technicals.”

The biggest problem is that technical indicators do not distinguish between a consolidation, a correction, or an outright bear market. As such, if you ignore the signals as they occur, by the time you realize it’s a deep correction, it is too late to do much about it.

Therefore, we must treat each signal with the same respect and adjust risk accordingly. The opportunity costs of doing so are minimal.

If we reduce risk and the market continues to rise, we can quickly increase our exposures. Yes, we sacrifice some short-term performance. However, if we reduce risk and the market declines sharply, we not only protect our capital during the decline but have the cash to deploy at lower price levels.

Such is the biggest problem with “buy and hold” strategies. Yes, you will perform in line with the market, but given that you didn’t “sell high,” there is no cash available with which to “buy low” in the future.

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