In our last note we remained cautious as the market looked vulnerable to some profit taking. This has not occurred in any scale, yet. Will this profit taking emerge or can this pace of buying continue?
We still stay skewed to the negative view, and can see the market dropping back to the previous upside resistance, now support, around 5,400 in the first instance, and then could slip down towards the previous resistance level, black line, currently around 5,150.
The Hindenburg Omen signal gained a lot of coverage this week as the S&P 500 is flashing up this signal which traditionally has helped to pick out tops in the market around 2-6 months before a 20-30% correction.
The signal essentially looks at the ratio of new 52 week highs and new 52 week lows, on the hypothesis that in a healthy positive market there should be a strong ratio of new weekly highs to lows. When the ratio of new highs to lows moves back towards parity, or even under, it signals that the market is pushing up to new highs only due to a few high profile names.
Which can be an early warning signal as then it only takes a market turn in a sector or two, or in just a few names, to pull the market lower. Currently this is the AI boom. Clearly AI will revolutionise the world at least as much as the internet has over the past 25 years. The issue is that, like the dotcom bubble of 2000, investors have been too quick to buy into any stock with any affiliation with AI. There will be a few huge winners with AI over the next decade. However the likelihood is that like the internet, this will be limited to a few huge winners, and not spread across the whole sector.
As a result the AI bubble could yet burst, and this would allow the Hindenburg omen to be proved correct in a few months time. Like last week, we are not calling the top of the market here, but we do feel that the underlying sentiment is one of greed at the moment, when this pivots to one more of fear there is now considerable downside.
So we would recommend a hold, take profits or even trading short position for the more active traders, as we wait to see how the market reacts when the heat starts to come out of the current sentiment.