Market Surges Back To Overbought As Investors Go “All In”

Market Review & Update

It seems like it was just last week that we were talking about adding exposure to portfolios. To wit:

“I suspect we may have some additional quarter-end rebalancing risk early next week. However, buying on Thursday next week, as second-quarter positioning gets underway, would not be surprising. As such, hold positions early next week and look for weaknesses to add to exposures as needed.

Such turned out to be the case as the markets slopped around early in the week. That changed as markets exploded to new highs on Wednesday and Thursday as portfolio managers charged back into the stocks sold off during the Archegos debacle.

With this understanding, you can appreciate why we increased our equity exposure last week. Currently, we are at full equity allocations, with a slight increase in the duration of bonds. Such leaves our portfolios at model weights in cash with bond durations shorter than our benchmark.”

While the rally was strong with the breakout to new highs, it also sent our “money flow buy signal” back to levels that previously coincided with market congestion (blue shaded area).

Importantly, the market is trading well into 3-standard deviations above the 50-dma, and is overbought by just about every measure. Such suggests a short-term “cooling-off” period is likely. With the weekly “buy signals” intact, the markets should hold above key support levels during the next consolidation phase.

However, risks are building that have preceded more significant market declines in the past (5-10%.) As I noted in this week’s “3-Minutes” video, we suspect the timing of that correction will be mid-summer. Such a correction could indeed occur sooner, particularly if hopes for further Government spending fade, tax rates increase, or inflation surges more than expected.

Regardless, investors are more exuberant about markets than we have seen since the “” craze.

Investors Are All In

There are two critical aspects to markets currently which keep us concerned near term. During bear markets, valuations are reversed from extremes as prices decline. However, “market corrections” do not reverse valuations as multiple expansions continue.

That was the case following the economic shutdown. Due to the Federal Reserve’s extreme interventions, prices quickly reversed from long-term bullish trend lines, and valuations were never reset from extremes. As such, all valuation metrics remain near or at historical extremes. A case in point is the historical “price to sales” ratio.

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Steve W 4 weeks ago Member's comment

I always enjoy your articles, Lance, but I have a question. Whenever anyone talks about the rising national debt, it's usually in the form of either total dollars, or as a percent of GDP. What would the historical numbers look like adjusted for inflation? In other words, when you say that the current debt is $28 trillion as opposed to $9 trillion 10 years ago and only $5 trillion 20 years ago, that isn't really comparing apples to apples, because a dollar is worth less today than it was in those past periods.