It’s not easy to spot a new market trend during a volatile bear market. During a bull rally, the challenge is determining if this is the right time to buy dips (and if support levels will hold). As we have seen recently, huge rallies can and do occur within bear markets. (Yes, this is still a bear market.)
Getting on board a new bull trend right now is nerve-wracking. Traders are trying to figure out when to buy into the names that are moving, and they are being very cautious in the process. A cautious approach makes sense; buying Amazon, Tesla or Chipotle, all of whom had ran higher this quarter, is tempting fate. Who wants to get in when the rest of the crowd is exiting?
Follow These Indicators to Spot a New Market Trend
Sentiment indicators look at past behavior. When using them as a guide, they require a contrarian stance and some delicate timing. Look for an extreme bullish or bearish stance, as that signals sentiment is about to change direction. The bull/bear ratio, Citigroup Sentiment Index, Citigroup Emerging Market Weather Vane and Investors Intelligence are all great sentiment indicators.
Another contrarian indicators is the put/call ratio. Lately, it has ticked down to all-time lows. When readings are very low, it means too many calls are being bought and thus traders are feeling too bullish. On the other hand, when the put/call ratio is elevated (the ratio is over 1), too much fear is present and a bottom is probably at hand.
New highs/lows is one of the more reliable long-term indicators and will tell if you if a rally is healthy or not. Back in September 2018, this indicator broke down just as the indices were making all-time highs. When new highs/lows diverge from current market action, look out! Price action often follows this indicator down a dark path, and that’s exactly what happened three months later when the markets were clobbered.
After last Thursday’s massive drop, you might be feeling especially skittish. Some of the most reliable indicators, including price and volume, are flashing bearish signals. I believe more downside is in our future. What to do? Wait for prices to stop going down. Follow the indicators to confirm a new market trend, and then start picking names to buy.