Stocks were up both in the US and abroad in this holiday-shortened first week of the year. More talk of a correction has been circling in the media, and the more overextended the markets globally and domestically become, the more severe a correction could be. To remind everyone, corrections are natural, and they are important to refresh the market cycle in order to allow for better buying opportunities. Both of the Universe Trend Indicators are still in positive uptrends, but as we saw at the end of 2017, there do not seem to be many more stocks participating in the trend, even as markets hit new highs. The levels are holding, but there has not been an advance in several months, which is disconcerting given market performance. Both of the Cash Comparison charts have hit new cycle highs to start 2018, which means that stocks are outperforming cash equivalents returns. The moves have been straight up since the Brexit vote in June of 2016. We would expect such moves more often to come off a Bear market low and not from a minor dip due to geopolitical events. The Long Term Momentum reading was positive again to end 2017, which makes 17 straight months of positive readings, the longest period since we have been following this indicator. There have almost straight-line increases in the month-end MSCI All Country World Index reading each month. Such types of movement are aberrations from what markets tend to do traditionally. Volatility continues to fall, but the risk-reward does not seem to be favorable at these market levels until a material pullback occurs.
The Tactical Indicators are in the highest part of their respective Neutral zones, both moving more aggressively to their High Risk/Overbought levels. The 10-week has reached the 72% level, which matches the level reached in October 2017 before a reversal took place. We could see a move into the High Risk zone after the end of Friday’s trading, which would be the first High Risk reading since January 2017. This move demonstrates an elevated level of short-term risk in the market. The MSCI All Country World Index has continued its strength, with higher highs through the 525 level. At the end of the Friday’s trading, we could see the indicator move to the Overbought level, which has not happened since May 2013. Even though we are in the strong seasonal period, it would be interesting to see if there is a convergence in the data points, thus allowing a potential tactical move.
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