As traders and investors, our innate instinct is to “fade strength and buy weakness” especially if you think something (or asset) is overbought or oversold.
And that has been the problem with the stock market’s rally. Prior to the COVID-19 lockdown move lower, the rally in equities and global assets were already at the “most hated rally of all time” category. Fast forward a little over a year and we are back to that, and then some!
The argument of “it’s priced in” or “it’s technically overbought” has gone by the wayside in recent weeks and months and now the market is in an insatiable grind higher. The market has left no margin for error for short traders and on a daily basis is luring investors, asset managers, portfolio managers and institutions to chase markets higher just to keep up with “index” returns or else face the consequences of redemptions.
What a toxic mix for the market.
You often hear “it’s healthy for the market to pullback” or “the market should consolidate its gains before making another advance.” I’m sorry, but I am thinking we are past this point now. And now we are in the FOMO stage, and unless there is a geopolitical event that rocks the boat, the market may be in a parabolic stage as we head into summer ahead of the ECB and FOMC events in June.
The price action for the US equity markets is one way. Shallow pullbacks, no room for entries or levels for shorts to exit. I’d say the next step is a “blow off top” scenario and who knows where that could lead us.