By John Del Vecchio and Brad Lamensdorf
One of the defining characteristics of the market advance since the COVID lows over a year ago has been broad participation from many sectors of the equity markets.
While most stocks have followed the major market trends, there are signs that this massive bullish move may be running out of steam.
The chart below, courtesy of SentimenTrader.com illustrates what has happened when the S&P 500 continues to regularly make new highs, but the majority of stocks start to trade below their 50-day moving average.
One such signal just occurred for only the seventh time since the 1920’s.
The results are sobering.
As the chart shows, when this rare signal occurs, losses pile up. Over multiple periods from a month to a year, the historical performance is down. The one-year historical performance shows a decline of 10%. What’s more, the performance has been positive only 17% of the time.
The average maximum loss is 18.5% compared with an average maximum gain of 5.6%. Poor risk / reward ratios don’t get much worse than that.
In fact, in each of the periods, the performance has been positive 50% of the time or less.
It may be time to start rounding up the hedges!
Originally Posted on July 22, 2021 – Breadth Weakens, Tossing Up a Red Flag
Disclosure: Lamensdorf Market Timing Report
Lamensdorf Market Timing Report is a publication intended to give analytical research to the investment community. Lamensdorf Market Timing Report is not rendering investment advice based on investment portfolios and is not registered as an investment advisor in any jurisdiction. Information included in this report is derived from many sources believed to be reliable but no representation is made that it is accurate or complete, or that errors, if discovered, will be corrected. The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are serving as independent public accountants with respect to them. They have not audited the statements and therefore do not express an opinion on them. The authors have also not conducted a thorough review of the financial statements as defined by standards established by the AICPA.
This report is not intended, and shall not constitute, and nothing herein should be construed as, an offer to sell or a solicitation of an offer to buy any securities referred to in this report, or a “buy” or “sell” recommendation. Rather, this research is intended to identify issues portfolio managers should be aware of for them to assess their own opinion of positive or negative potential. The LMTR newsletter is NOT affiliated with any ETF’s.
Active Alts is affiliated with Lamensdorf Market Timing Report. While LMTR uses charts from SentimenTrader, they do not have a financial arrangement with SentimenTrader. Past performance is not indicative of future results.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Lamensdorf Market Timing Report and is being posted with permission from Lamensdorf Market Timing Report. The views expressed in this material are solely those of the author and/or Lamensdorf Market Timing Report and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.
Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.