“Daddy, are we there yet?”
“We’ll get there when we get there. Try and relax.”
It’s the same story every road trip. Anyone who has taken a 3-hour car ride with young kids knows the strife I speak of.
The first half hour is a thrill. We’ll play “I spy” and sing songs to kill time. But then something changes as boredom sets in. The anticipation of the destination isn’t the focus anymore.
Extreme overbought periods for stocks are similar to agonizingly long road trips. Impatient investors, like anxious kids may start out planning for a pullback. They are eager to wait for great deals.
But being patient is hard! The inevitable questions start trickling in: are we there yet? Is it time to go to cash?
Patience and process quickly give into emotional impatience. Experienced investors are the road-trip driver: they know we’ll get there when we get there. Being frustrated that we’re not there is a waste of energy. And it rubs off on everyone else too- like kicking the seat.
I learned long ago, there’s peace in the moment: enjoy the ride, take in the scenery, and let your mind wander. 150 miles is 150 miles no matter how you slice it…
That brings us to where we are now. Stocks are doing some incredible things. Yesterday’s rally was epic from a data standpoint. Things are getting extremely overbought.
We gave our data-driven market forecast, “when will stocks pullback” back on December 20th for our readers. What we are seeing now is late-stage irrational buying.
So, about that nagging question:
Are we there yet? Have market’s peaked? Could it go on?
Sure. But, no matter what: data drives our decisions.
Big Money Index – Are We There Yet?
Markets have been overbought for nearly 5 weeks. This is right in line with our 30-year historical average. MAPsignals data told us to expect this.
The Big Money Index is leveling off:
We believe the BMI has peaked which our data predicted would happen December 21st. So far, the actual peak reading of 91.9% was December 18th! So, our prediction was off by only one trading day – but right on schedule…
This flattening indicates we’ve reached that orbital velocity we were expecting. Any meaningful pullback in the Big Money Index would be a warning sign.
But before you ask if we’re there yet, you should know that markets sometimes stay overbought for incredible durations.
For example, look no further than last year. We looked at overbought periods going back to 1990. Shockingly, 2020 stayed overbought for nearly 6 months!
Some trips take longer than others. Being annoyed doesn’t change the arrival time.
As I said, we religiously follow the data.
Where the BMI goes, markets tend to follow.
So, We’re not there yet!
But, we are getting closer. Let’s pass some time looking at some scenery.
Stocks See Epic Buying
We foresaw yesterday being an epic buy day. And we were right.
Below shows the daily count of stock buy and sell signals. It was a monster day:
Let’s zoom in on that. We call this juice:
Typically, when we see meg-buying like this, while being extremely overbought, it’s a warning sign: Things are frothy.
Most buying was in Discretionary, Financials, Energy, Industrials, & Materials… familiar strong sectors lately.
“Now, are we there yet?”
We’re getting there. But this wasn’t the only warning sign.
ETFs Also See Huge Buying
To get where you’re going, you’ve got to know where you’ve been. Most importantly, you’ve got to know where you are. Sometimes big buying is bullish, like when stocks have been in a downtrend.
Other times like now, it’s late stage buying. When we see epic ETF buys in an extremely overbought market…it’s usually signaling a near-term bearish warning.
Looking above, we see that big green ETF sticks usually align with near-term market peaks.
The warning signs are here folks. The signs say the big bullish road trip is coming close to the end. But when the road trip ends and we get to Disneyland- the fun starts!
So, don’t freak out- this doesn’t mean we are bearish on stocks medium or long-term. We foresee a market pullback as a natural correction. When stocks get too lofty, they need to come back in line.
So, don’t get too impatient! Jumping in and buying stocks with both hands now is likely a poor idea. Better prices are likely around the corner.
The Bottom Line: extreme greed is in the air. Signs are pointing to a near-term peak in the coming weeks. Our data predicted the BMI to peak December 21st. It happened on December 18th. Our data predicts that the market will peak on January 18th, 2021 at a level of 3828.50.
Whether or not we nail it to the day is unimportant. What is important is for you to start prepping your buy lists now. Be prepared, but also try and relax. The ride is the ride, no matter how long or short we want it to be.
The next time someone asks you: Are we there yet? Has the market peaked?
Feel free to use my response: I spy with my little eye, a blow-off top is nigh.
Lucas is co-founder of MAPsignals. His full bio can be found here.
Prior to MAP, he was Head of ETF Sales at Cantor Fitzgerald & SVP of Derivatives at Jefferies, LLC.
Big Money 20 January 2021
Hi gents. Well as I’m writing this shortly after your post the SPX is at 3805. Would you prioritise the date or the SPX value in your prediction? Thanks
Hey Tomas – it’s only a framework to build expectations. The data will always be paramount.
For us the timing tends to be more important than the level. The beauty is we can pivot with new incoming data. Enjoy the ride!
As usual great post, patience is the key to success in this game!
Hi first of all. Thank you for your service, a bright spot in the advisory market.
I have a theory that should match yours and was wondering about your opinion.
I fully agree that during the following two to three weeks the market will significantly correct and this might be simply after the major earnings…the actual and main reason will be results and guidance totally inconsistent with the current lofty valuations…Thanks
It certainly could be the case. Often we find that the price action occurs first, then the story follows.
In general, there tends to be clues that we can point to once buying in stocks slows. Always keep in mind that we are in extraordinary times. Holding outlier stocks tends to pay off long-term no matter what happens.
What are examples of outlier stocks.
Hey Dita – check out our whitepapers to get a feel for what outlier stocks are.
You can find our white paper catalog here: https://mapsignals.com/white-papers/
It is too simple to rely – or put too much weight – on one single indicator. The Smart Money Index is one of many. An important one. But watch also the VIX, The Accumulation – Distribution Line – and – first and foremost the chart itself.
100% agree. We look at everything in the collective to base our outlook.
A live day to day BMI chart would be a great addition to the site
That is the top priority this year. Bringing our data to life for everyone.
We will get there, likely in 2021.