Market timing is crucial for active investors due to two primary reasons. Firstly, the recent surge in the market presents the challenge of resisting the temptation to enter at inflated prices and potentially suffer losses during ordinary market pullbacks. Secondly, when riding a trend successfully, it is imperative to avoid overconfidence. Markets can be unpredictable and reverse suddenly, punishing overconfident investors. Patience and disciplined decision-making are key in such scenarios. To prevent over-committing to a possibly unsustainable trend, it is essential to stay vigilant, periodically reassess risks, and have exit strategies in place. Relying on data and historical trends is far better than gut feelings or anecdotal evidence alone. Here are eleven charts that point to the current rally’s potential unsustainability in the short term:
Chart #1: Downside Volume Near Record High Signals Warning Shot
A 90% downside volume day in the market signifies a day where 90% or more of the total trading volume is concentrated in stocks red for the session, indicating a substantial and broad-based sell-off. On Tuesday, Mark Ungewitter observed that the NYSE suffered a 90% downside day within 3 sessions of recording a record high. Such a signal is rare, but it has marked significant market tops the past four times it has occurred.
Image Source: SenimenTrader
Chart #2: Rate Cut Odds Plummet
A few months back, the market was pricing in a March interest rate cut. However, after Tuesday’s hotter-than-anticipated CPI reading, the CME FedWatch Tool is now pricing in a ~90% chance rates will remain unchanged in March.
Image Source: Chicago Mercantile Exchange
Chart #3: Presidential Election Seasonality
Presidential election seasonality refers to the observed patterns and trends in stock prices during the lead-up to and aftermath of a presidential election. Historically, in a presidential election year, stocks retreat from February to March before gaining bullish momentum into year-end. Stocks are entering their historically weakest period of an election year now:
Image Source: Ryan Detrick, Carson Investment Research, FactSet
Chart #4: CNN Fear & Greed Index
The CNN Fear & Greed index combines various factors, including market volatility, breadth, put and call options, and other indicators, to generate a single composite score on a scale of 0 to 100. Over the past few years, fading sentiment extremes in the indicators have bode well for investors. The Fear & Greed Index currently sports an “Extreme Greed” reading.
Image Source: CNN
Chart #5: NASI Flashes “Bear” Signal
The McClellan Oscillator is a market breadth indicator designed to analyze the advancing and declining issues in the stock market. The faster moving average recently crossed below the slower moving average, signaling a bear cross. Historically, there are very few signals, but when there is one, they tend to be meaningful.
Image Source: StockCharts.com
Chart #6: Volatility Seasonality
Over the next month, the Volatility Index (VIX) has historically averaged a sharp rise. After such a bullish trend in equities, a pick-up in volatility would not be surprising and would shake out “weak hands.”
Image Source: Equity Clock
Chart #7: “Hindenburg Omen” Signal Flashes
SentimentTrader identified a rare Nasdaq “Hindenburg Omen” signal. The signal, created based on historical work by researchers, monitors specific conditions that signify potential underlying market weakness. Multiple signals in a cluster are a worrying sign. Traditionally, the signal is canceled after 30 days or if the Oscillator turns positive again, though it can lead to market trouble several months in advance.
