There a number of factors that lead me to believe that this bubble may be about to pop. Are we reaching irrational exuberance?
I know you might be thinking it’s all doom and gloom on this blog as of late. Well, you’d be right, as my more bullish and optimistic colleague Jamie has been away on holidays and I’ve had to fill in for the week. I’ve learned it’s easier to be a pessimist because you’re either going to be right or you’re going to be happy.
The most recent feather in this bearish cap of mine is the following graph by SentimenTrader on Twitter (NYSE:TWTR) — who is a must-follow by the way for all you fintwits out there. It shows 56% of the S&P 500 (NYSEARCA:VOO) are on a MACD sell signal right now. The most telling sign from this graph is the correlation between the spikes in sell signals and dips in the S&P 500.
A record breaking 56% of S&P 500 stocks are on a MACD sell signal now! pic.twitter.com/3cTCIKXXpK— SentimenTrader (@sentimentrader) June 16, 2020
For a quick explanation, the MACD stands for ‘moving average convergence divergence’. It’s one of many very technical and convoluted ways of tracking momentum used by traders. It utilizes two different moving averages of the price of a security to track whether the bullish or bearish sentiment of a stock is strengthening or weakening. For a full explanation please check out Investopedia’s excellent resource on the matter.
Is this the canary in the coal mine?
I am very reluctant to ever take one technical indicator too seriously. There is no magic valve somewhere that, once it’s pushed into the red, the market automatically dips. Unfortunately, this is not a lone siren. The recent performance of stocks like Hertz (NYSE:HTZ), Chesapeake Energy (NYSE:CHK), and Luckin Coffee (NASDAQ:LK) should be evidence enough to show that a blanket of speculation and irrational exuberance has engulfed the market. Other indicators include the net number of puts minus calls (bets stocks will go up minus bets they’ll go down) being at a record high, CNN’s Fear & Greed Index ticking over significantly into Greed territory last week (it has retracted to neutral since). Perhaps the most significant of all indicators is the most simple, this market is the most overvalued it’s been since the Dot-Com Crash. You can wilfully ignore one signal on your car’s dashboard, but once they all start lighting up it’s time to go to the garage.
In case you missed it:
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- 4 Stocks I Want to Buy If the Market Crashes Again
What can you do?
There will be no magic tipping point, no shoeshine boy, and no combination of technical indicators that will start blinking on your dashboard before a downturn, nor is it guaranteed to happen soon. While all the indicators may point to an ensuing correction, there is no telling what the stock market will do in the short term.
Could there be a resurgence of stay-at-home stocks like Netflix (NASDAQ:NFLX), Zoom (NASDAQ:ZM), or Slack (NASDAQ:WORK) as indicators point to a second-wave? Will the Fed continue to extend its safety net to soften the impact of the economic fallout on the market? Will the seemingly infallible FAAMG stocks of Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Google (NASDAQ:GOOG) continue their reign over the major indices? It’s always important to look at both sides of every argument, and there are many factors that are driving the current market too. To try and predict the top is folly, all we can do is continue to invest with the same long-term strategy that has brought MyWallSt market-beating returns since its inception. I will leave you with a quote from our all-time favorite investor Peter Lynch which seems incredibly apt right now:
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
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