Even Some Technicals Are Now At Historical Extremes

I’ve written extensively about how valuations of the U.S. stock market are at historical extremes exceeding even 1929 and 2000. I’ve discussed how valuations are not at all reliable for predicting short-term movements but quite reliable for predicting returns over the next 10-12 years and, so, can be valuable for financial planning and investment strategy.

The implication of extreme valuations today being that annualized returns for U.S. stocks will likely be much closer to 0% than their 10% historical average over the next 10-12 years and with a lot of volatility in the interim.

However, now, we’re starting to see technicals hit historical extremes as well. Technicals are often-used for predicting short-term movements and identify key trading signals although they are still far from reliable.

They are interesting to at least monitor in order to get a feel for the market, investors attitudes towards risk, key trading signals others may be using, etc…

Here are a few technical metrics that have hit extremes recently.

From @SentimentTrader

“Tech’s momentum is extreme. NASDAQ 100’s 20-day moving average has gone up 88 days in a row, THE MOST EXTREME IN HISTORY. Similar streaks always ended with SHARP corrections over the next month.”

From @LizAnnSonders

“From @sentimentrader: over 1/2 of stocks in @Nasdaq are in bear markets, meaning they’re 20% or more below their 52-week highs; past occurrences when high % of stocks were in correction or bear market have led to poor returns for Nasdaq & S&P 500 over following 3m”

From @TaviCosta

“Record complacency. Consumer confidence in households w/ lower education is at its highest in 42 years. It only reached similar levels at the height of the tech bubble, in March 2000. An incredibly reliable contrarian indicator. Not to disparage anyone.”

And then Morgan Stanley shows us market breadth is extremely low, which is sign of risk creeping into the markets / investors becoming more risk averse as opposed to when everything goes up together and investors are indiscriminant about what they are buying.

As always, don’t chase the market! I know it’s tempting to chase when the market moves like it has over the last year, but that’s exactly how people get sucked in at the market tops only to get slaughtered in the bear market. Maintain your discipline and adhere to the investment strategy that is informed by your financial goals and long-term financial projections!

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS!

There are many factors that influence stock prices and broad market performance. The market is unpredictable in the short-term, but technicals can sometimes help us ascertain the temperature of investors and traders. Not investment advice…for educational purposes only.