THE LMTR EDGE:

Join over 25,000 investors and get alerts for:
  • Market Timing Reports
  • Sentiment Updates
  • Chart of the Week
  • Weekly Podcasts
  • The Magic Number - Top Stocks

Category: Chart of the Week

Supply > Demand = Lower Stock Prices Ahead

By John Del Vecchio and Brad Lamensdorf

It’s simple really. When supply exceeds demand, prices tend to head lower. Last week, The Chart of the Week highlighted Warren Buffet’s favorite market indicator. Valuations are stretched to say the least. Of course, what’s overvalued can become more overvalued before markets correct.

This week we look at price action. Specifically, the Bullish Percent on the S&P 500. The Bullish Percent Indicator measures the percentage of stocks in bullsih trends using point and figure charting. Point and figure is a century old. The beauty of this method is that its simple to understand. Stocks are either in a bullish or bearish trend. 

Furthermore, unlike the indexes which tend to be market-cap weighted, Bullish Percents use a “one stock, one vote” weighting method. Each stock is viewed the same. This can highlight pockets of strength, weakness, and most importatnly, divergences in the market.

Look at the chart below.

Supply > Demand = Lower Stock Prices Ahead

Supply > Demand = Lower Stock Prices Ahead

There’s been a huge run in the S&P off the lows several months ago. That represented a period where stocks became deeply oversold and market sentiment was simply too negative. 

We were very bullish near the lows.

Not anymore. 

While the indexes surged, a lot of stocks simply ran out of breath recently. They couldn’t keep up. While technically the S&P 500 didn’t get so overbought as to register a sell signal, stocks sure did in the over-the-counter market.

Now prices are reversing. 

More negative trends are starting to emerge.

What does this all mean? Well, risks are higher here. Yes, the market could bounce and rally from here. But the risks are all those gains, and then some, will disappear. 

Markets tend to overshoot. In both directions. 

There will be low risk opportunities to scoop up stocks in the future. Possibly the near future. But we have a way to go from here. Market sentiment is also too bullish to get aggressive buying stock here.

Contrarians will simply sit on their hands for now.

The Active Alts SentimenTrader Long / Short strategy uses numerous indicators to identify market extremes and adjust exposure accordingly for superior risk-adjusted returns. To learn more, visit activealts.com

Buffet’s Favorite Indicator Screams “Sell”!

By John Del Vecchio and Brad Lamensdorf

Buffet’s Favorite Indicator Screams “Sell”! The favorite market indicator of Warren Buffett, the richest investor in the world, has flashed a screaming sell signal. The total market cap of the Wilshire 5000 relative to gross domestic product (GDP), is now at generational highs.

Take a look at the chart below.

Buffet’s Favorite Indicator Screams “Sell”!
Buffet’s Favorite Indicator Screams “Sell”!

The ratio of market value to GDP stands at 144%. That’s over 2.5x where it stood at the depths of the financial crisis in 2008-09! Not only that, it now exceeds the extreme levels of the market back during the Internet Bubble.

We all know how that ended. Trillions of dollars wiped out from investors’ accounts before the market normalized and it was time to buy shares again.

The current levels of market value to GDP are not just high, they are at extremes. 

Market extremes on both ends provide great opportunity for outsized returns with lower risk.

Right now, the risk is to the downside.

Buyer beware!

The Active Alts SentimenTrader Long / Short strategy uses numerous indicators to identify market extremes and adjust exposure accordingly for superior risk-adjusted returns. To learn more, visit www.activealts.com. 

 

See More Chart of the Week Posts:

Fed Low-Interest Rate Policy is  Forcing Investors To Take Dangerous Investment Risks in Desperate Search For Better Yield

Fed Low-Interest Rate Policy is  Forcing Investors To Take Dangerous Investment Risks in Desperate Search For Better Yield. The 30-year  chart below shows US corporate bonds moving into negative yields.  That’s the result of the Fed policy to keep interest rates low to stimulate the economy. However, those  negative rates also are causing many individuals and institutional investors, including insurance companies and pension funds, to take enormous risks for higher yields. For instance, to make up for actuarial deficiencies for underfunded pension funds.  The shifting money away from the corporate bond market into areas like the overbought stock market and many real estate classes is pushing up asset values beyond reasons.  And, that raises questions about whether the low-interest rate policy will ultimately do more harm than good when these investments come tumbling down.

Fed Low-Interest Rate Policy is  Forcing Investors To Take Dangerous Investment Risks in Desperate Search For Better Yield
Fed Low-Interest Rate Policy is  Forcing Investors To Take Dangerous Investment Risks in Desperate Search For Better Yield

See More Chart of the Week Posts:

 

When US Financial Conditions Collapse the Stock, Market Is Sure to Follow

When US Financial Conditions Collapse the Stock, Market Is Sure to Follow. As you can see from the chart below that goes back 30 years, when US financial conditions go down, the stock market inevitably follows. The chart, which was produced before the end-of-the-week downturn, is among many historically accurate indicators we’ve been using that have told us a big market drop has been coming. Although drops can take months after the indicators we use are signaling tops. Nevertheless, those indicators have been signaling us to take profits now and go heavily into cash in our Active Alts SentimenTrader Long/Short strategy.

The reason? Our strategy  seeks to minimize risks for longer-term profitability. So, that cash gives us the ammo to short weak stocks during downturns and at the same time keep big reserves to buy stocks near the next bottom.  How will we know when the markets have reached near bottom?  The same indicators we use to tell us when stocks are overbought tell us when they’ve become oversold.   In the chart, you can see the recent major gains by the of  S&P 500 index despite the huge drops in the nation’s Financial Conditions Index (FCI).  So, history tells us that a sharp stock market drop is all but inevitable. FYI, the FCI was created by Goldman Sachs because older models, such as the effects of short-term interest on the Gross National Product (GDP) have broken down in the last decades as a result of the growing complexities of national and international economics.  The FCI is defined as “a weighted average of riskless interest rates, the exchange rate, equity valuations, and credit spreads, with weights that correspond to the direct impact of each variable on GDP.”

When US Financial Conditions Collapse the Stock, Market Is Sure to  Follow
When US Financial Conditions Collapse the Stock, Market Is Sure to
Follow

See More Chart of the Week Posts:

Low S&P 500 Short Interest is Another Sign Stock Investors Are Overly Complacent

Low S&P 500 Short Interest is Another Sign Stock Investors Are Overly Complacent. As you can see from the chart below, median short interest on the S&P 500 as a percentage of market cap is the lowest in years.  And that  means hedging against a downturn by shorting also is at its lowest in years. Why has that happened? As the stock market continues to move up an increasing number of investors are becoming convinced that there’s no downturn in sight. So, there’s no need to protect their financial well-being. Since investors historically are wrong about calling market tops and bottoms, for us, this is another warning sign among many we’ve talked about in recent weeks to take defensive measures, including cashing out on stocks with big appreciation.  Which is what we’ve done in the long/short portfolio we manage. (See this week’s LMTR sentiment update)

Low S&P 500 Short Interest is Another Sign Stock Investors Are Overly Complacent
Low S&P 500 Short Interest is Another Sign Stock Investors Are Overly Complacent

See More Chart of the Week Posts:

2018 - All Rights Reserved © LMTR, LLC

Privacy Policy - Contact Email: info@lmtr.com