Sometimes you just get a feeling—and right now, I’m nervous about the stock market this month.
The stock rally we’ve been experiencing since December 24, 2018 has been the fiercest and most persistent one I can remember. On Christmas Eve, the S&P 500 bottomed at 2,316. Since then, it’s gone on a straight line up to around 2,810—a 21% gain.
Anyone who’s tried shorting the market over the past two months has been obliterated. And stock investors are feeling pretty good right now—like the market can go up forever.
But conventional wisdom says that the market has moved too much too fast. So does this mean the bears are ready to roar soon?
I reached out to our Wall Street insider, Jason Bodner, to get an answer on that. But before I get to his insights, let me tell you what’s making me nervous…
Signs of Rare Strength
One way to measure the market’s strength is to see how many times it closes above its 10-day moving average (MA). Currently, the S&P 500 has closed above its 10-day MA for 40 consecutive days.
How rare is that?
The last time it did so was in 2010—when the S&P closed above its 10-day MA for 42 straight days from February to April. You’d have to go back 13 more years to find another streak like that… In the spring of 1997, the S&P had 35 straight closes above its 10-day MA.
And to find another sustained rally, you’d need to go back even further—all the way to 1972.
But the last two times the market peaked—in 2011 and 1997—it proceeded to fall 19% and 9%, respectively.
Historically speaking, a pullback is imminent; nothing goes straight up forever. But the market’s momentum isn’t the only thing that has me worried…
Investors Are Overly Bullish
Every week, the American Association of Individual Investors (AAII) releases a survey of investor sentiment. It asks investors whether they’re bullish, bearish, or neutral about the market over the next six months.
The survey can be a good contrarian indicator… When investors are overly bullish, they’re likely already invested. That means there’s little money left to go into the market. So the market often reverses at these extremes.
If you compare the number of bullish investors versus bearish ones, you can gauge the mood of the market. As you can see in the chart below, investors are very optimistic right now:
The last time there were this many more bulls than bears was October 5, 2018. And that marked the start of the market’s 19% fall last quarter.
So are we headed for another pullback? I got in touch with Jason to find out…
The Wall Street Insider’s Take
Regular readers know Jason is the editor of Palm Beach Trader. After spending almost two decades on Wall Street, he created a proprietary system that scans nearly 5,500 stocks every day to look for those that institutions are likely buying.
Jason’s system also looks at the ratio between buyers and sellers in the market. And it’s been very accurate and timely. In fact, he called for a bounce in December 2018, which came right on time.
If anyone has their finger on the pulse of the market, it’s Jason. So I told him about my concerns. Here’s his response…
Well, logic dictates that we’ve gone up too far too fast—and that we should correct soon. I’ve been hearing some iteration of this daily for weeks now as well. But I don’t think it’s time to worry yet.
My system has seen 538 unusual institutional buy signals and only 48 sell signals for the week ending March 1. So buying is still going full force. This means we can stay overbought for a while to come.
My ratio will start falling only when we see some buying abate and some selling pick up—which hasn’t happened at all yet. In fact, there’s still an overwhelming amount of buying. And it’s happening in small- and mid-cap growth-oriented names.
And there’s another good sign: The market has weathered a great deal of negative news lately—which also indicates strength. More from Jason…
We’re definitely overbought. Everyone can pretty much conclude that the market’s due for a pullback. But my data suggests buying is still alive and well under the surface.
The North Korea summit collapse and Michael Cohen’s testimony had more than a few people checked out last week as they focused on the juicy news stories. And when negative headlines can’t bring a market down, it means there’s a stable ballast of buying underneath. That’s what we’re seeing now.
The trend says buying is alive and thriving. So we need to pay attention to when the buying slows and selling begins to properly call a turn in the market. We’re just not there yet. We may be there tomorrow, next week, or even next month. But for now, we should ride the tide.
Now, Jason’s system has proven accurate over the years when it comes to pinpointing market tops and bottoms. For instance, his system predicted the top in February 2018 and the bottom in December 2018.
So although the market is red-hot right now, a pullback doesn’t look imminent—at least not yet. Based on Jason’s data, it could come within days or maybe not for a while.
How to Position Yourself
Despite the signs that the market is getting overheated, Jason’s data reminds us that uptrends can last longer than expected.
If you want to take advantage of the continued momentum, consider adding some exposure to small- and mid-cap growth companies.
One way to do that is with the SPDR S&P MidCap 400 ETF (MDY). As long as it stays above $347.50, upward momentum is intact.
These companies will likely get a higher bounce from continued buying. However, they’re also very volatile, so position-size wisely.
Analyst, The Palm Beach Daily
P.S. As I mentioned above, Jason’s proprietary system scans nearly 5,500 stocks every day. And at least 10 days before Wall Street files market-moving documents with the Securities and Exchange Commission… his private, $250,000 database flags when big money is flowing into certain trades.
His system has shown historical gains of up to 352% in six months. And you can use the same “cheat sheet” to predict which stocks are about to skyrocket—several days or weeks in advance. Get the scoop here…
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