In the past few years the stock market has always recovered from corrections to make new highs, and we cannot be sure if the party is indeed over. However, both from a fundamental and technical perspective, the probability that it is over seems quite high. Should market internals and trend uniformity to the upside improve again, this assessment would obviously have to be revised. However, there are surely more than enough warning signs extant now and every financial asset bubble must end at some point.
File this under Devil's Advocate: what if the easy money in the stock market is no longer the "guaranteed" Bull melt-up but the Bearish bet on a sudden air pocket? Just as a thought experiment, put yourself in the shoes of the money managers who have the leverage to move the markets.
According to the recent AAII Asset Allocation Survey by retail investors, cash levels in July dropped to the lowest level since 1999 at only 15.8%. It appears that the average retail investor has once again been led astray by monetary pumping.
Is this stock market decline the "real deal"? (that is, the start of a serious correction of 10% or more) Or is it just another garden-variety dip in the long-running Bull market? Let’s start by looking for extremes that tend to mark the tops in Bull markets.
There is no edge.
I am sure those who were buying the "Kool-aid" at the market highs feel that way, but the numbers tell a different story.
Several warning signs are gathering steam...
The "smart money" indicator is at its most extreme degree of selling since November, 2010.
The technicals break with the news!
This is a headwind we shouldn't ignore.
The 'cash on the sidelines' myth has more lives than a cat. No matter how often the logical fallacy underlying it is pointed out, Wall Street continues to propagate it. Nevertheless, money and credit are of course extremely important factors in the analysis of asset markets. The below provides what are hopefully a few useful pointers as to which data one should keep an eye on in this context.
Crisis was averted. Or was it just put off for another day?
In essence, you need to be selling strength.
The "Mixed Signals" from 2 weeks ago, which morphed into last week's clues, must mean something this week as the markets had their worse day in 7 months on Friday.
At these levels of bullish sentiment, fewer bulls isn't a contrarian signal but a sign that there are fewer investors willing to push the market higher.