Technically Speaking: Bulls Run As Liquidity Floods Market

This currently where we are in the markets today.

As discussed, with investors fully allocated, the risk remains that markets are trading at near-record extensions of longer-term means. The monthly chart below shows the current deviation from the long-term mean. Two things to note:

  • The market is exceptionally overbought longer-term; and,
  • The negative divergence in relative strength is highly concerning.

(Click on image to enlarge)

Bulls Liquidity Market, #Technically Speaking: Bulls Run As Liquidity Floods Market

It is generally near market peaks when investors are the most complacent about risk. While I certainly agree in the shorter-term, the liquidity flood has mitigated downside risk; it only exacerbates longer-term consequences.

Another Surge Coming

Currently, investors are very exuberant about markets, although they can get more so.

(Click on image to enlarge)

Bulls Liquidity Market, #Technically Speaking: Bulls Run As Liquidity Floods Market

With the flood of stimulus into the market, another surge higher would not be a surprise. Such would correspond both with the peak of liquidity inflows and the peak in earnings and economic growth expectations. From a technical perspective, this also aligns with the weekly “money flow” index, turning positive. Typically, these weekly “buy” signals last roughly two to three months before reversing.

(Click on image to enlarge)

Bulls Liquidity Market, #Technically Speaking: Bulls Run As Liquidity Floods Market

Note the blue vertical dashed lines below. Those lines are the weekly “buy” and “sell” signals overlaid on the daily chart. The blue boxes show where the daily and weekly sell signals converged previously.

(Click on image to enlarge)

Bulls Liquidity Market, #Technically Speaking: Bulls Run As Liquidity Floods Market

When both indicators align on “sell signals,” blue boxes, market volatility rises markedly. However, markets tend to increase when both indicators align with “buy signals.”

With both “buy” signals close to aligning, I would not be surprised to see markets make another advance higher near term. However, focusing back on longer-term market dynamics, the deviation from the longer-term mean is extreme.

Reversions always occur when least expected, and always for a reason “no one sees coming.”

Buy Now, Sell Later

With markets still in the “seasonally strong” period of the year, lots of liquidity, and plenty of exuberance, this is not a time to be “bearish” on markets.

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Carl Schwartz 1 month ago Member's comment

Yup!! Bull's run for exit is next!!