As of Friday, December 9, 2016 at the close of trading EquitySurge™ has continued a strong sell signal for USA equities.
Stocks finished the week with another push higher and new record highs all around. The blow-off top is in full-swing, but prudent investors need to heed the warning from liquidity.
Back in February and March when liquidity was giving us a strong signal to aggressively buy equities around the 1850 S&P500 Index level, corresponding volume flows into stocks were heavy and consistent. Right now equity prices are rising almost straight up, but there is much less volume accompanying the price rise as compared to February and March, and liquidity is telling us that something is wrong with this rally in stocks. These are messages not to be ignored.
Another aspect of liquidity that we track closely is high yield bonds. There is a long-standing correlation between high yield and equities. When money is flowing into high yield it will also soon be flowing into stocks, and the reverse as well. Back in February and March high yield was climbing aggressively with strong positive money flow, and sure enough stocks were soon rising as well also accompanied by strong money flow.
The situation today is the opposite: money is flowing out of high yield as stocks are climbing almost vertically higher. This is a dangerous situation for long equity positions, and while we all want to extract as much out of a bull rally higher in stocks as we can, our job here is to relay what we are seeing on the liquidity front, the single best indicator of where stock prices are heading, and what we are seeing is a strong warning to exit longs.
This vertical, blow-off ascent higher in stocks may continue, it’s very difficult to tell. Our Fibonacci target for the S&P500 Index is 2261, but that could easily extend to the round number 2300 level. However with liquidity strongly warning against staying long equities we are selling stock positions aggressively into this blow-off top.
If you would like to review the EquitySurge™ trading signals generated so far in 2016 please see the Trading Signal Performance Chart page.