3 Reasons Why We’re Near A Top

There are a few major alarm bells ringing which signal a top in this bull cycle could occur in the next few months. I will review those ominous signals in this article. Then I will review the latest news in the battle to get healthcare reform passed Congress. The one obvious positive the GOP has in its corner is that it’s still early in the term. The initial proposal by Paul Ryan was brushed aside by conservatives, but because President Trump said the plan was up for negotiation, there is a possibility something will get done. The establishment needs to make the conservatives feel like they had their say in the plan before they’ll support it.

I consider it bullish for stocks if healthcare passes Congress by the end of the year. It will be interesting to see how small business and consumer confidence surveys show the reaction to the lack of tax reform and an infrastructure plan in the first 8 months of Trump’s term. Will they lose hope or will they maintain optimism? It shouldn’t be a surprise that these plans will take many months to become law, but if the economy is weak, consumers and businesses will lose patience. It’s possible that a recession can be over by the time reforms are passed.

Reason 1

The first ominous sign the market is showing is real NYSE margin debt growth is near the peak of the cycle which is higher than the last two cycle peaks. I drew an increasing trend-line from the past two peaks in the chart below. The level of margin debt exceeded the trend line in April 2015 and is about to pass it once again. Margin debt trading becoming overleveraged was the cause of the 1929 crash.

 

Unsurprisingly, the levered exposure is mainly on the long side. It’s not a realistic trading strategy to be net short stocks in this market. The only time you can successfully short is by picking individual overvalued names. As you can see from the chart below, the net long exposure among long/short funds has moved toward the long side since Election Day.

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