The Everything Rally Continues

The market’s strong uptrend remains intact despite some lingering concerns about high valuations, extreme sentiment, and other overbought signals. Investors continue to pour into all markets (stocks, commodities, crypto etc.) with ever increasing liquidity.

Now let’s look at some bullish and bearish factors to get a balanced view of the markets.

Average momentum

The non-stop rally across almost all markets has pushed many indicators to extreme levels. Taking a 9 week RSI of a combination of stocks, commodities and treasury yields quickly shows that we are at one of the most overbought levels in history.

 

When this happened in the past, it was not a good sign for stocks or the 10-year treasury yield over the next year on most time frames.

However, this was a very bullish sign for commodities over the next year.

Strong Breadth

Breadth is incredibly strong around the world. The MSCI All Country World Index has more than 84% of stocks above their 200 day moving average.

Historically, such strong breadth led to more gains in the stock market over the next year.

Improving Economy

The recent surge in copper has caused the copper:gold ratio to spike. The 6 month percent change of this ratio is now close to 50%.

Such a large spike was only seen 5 other times and this was great for stocks over the next year.

Surging margin debt

U.S. margin debt soared in the past 10 months since March 2020. This kind of increase was only seen 4 other times since 1959.

Three of these cases in 1972, 2000 and 2007 led to a bear market with the exception of 1983, which marked the start of a -14.3% correction that lasted a year.

Fund flows

Fintwit has been captivated with the idea that there is a lot of money left on the sidelines that can push stocks higher because fund flows (e.g. SPY ETF) are not registering extremes. This argument is wrong because:

  1. There is always “more cash in the sidelines”, even at the peak of bubbles. There is no way to measure just how much cash there is left “on the sidelines” because “the sidelines” is a vague concept.
  2. Not everyone buys funds. This rally has been heavily pushed by traders that are gobbling up individual stocks.
  3. While fund flow indicators are extremely popular, there are a lot of nuances that traders don’t think.
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William K. 2 weeks ago Member's comment

Very interesting, and an impressive display of data that appears to point in a specific direction. But I am slower than others to conclude that the past ALWAYS indicates the future, although it is often a valid example of repeat performances. But while I do wager at times, I never am gambling when I do that.