As the market has now struck the upper end of my long-term target set many years ago, it seems many have embraced this bull market, to the extent that they see no reason for it to end. However, that is usually the time one has to pay attention for the potential for it to come an end.
When the general investor community is convinced that “there is no reason to get out of the market at any time,” it tells me we are likely approaching a major topping point, which actually aligns with my general technical analysis work. Moreover, if you are an astute market observer, you would even recognize that the inverse expectation also rings false, as we have seen markets rally during rising rate environments. We have very clear evidence that the market even rallies during Fed rate increases, as we experienced a 1100-point rally from October 2022 until September 2023, when the Fed finally cut its rate for the first time.
Elliott Wave International puts out a publication called The Elliott Wave Theorist, which always includes interesting information regarding the stock market. And, I am going to present a few of their recent narratives and charts, which outline the extremes we are seeing in the market today. “US mutual funds’ cash holdings have fallen to the lowest level in Bank of America’s records going back to 2015, suggesting increasingly bullish equity sentiment that coincides with the start of the Fed’s easing cycle. The team led by Savita Subramanian says cash allocation fell to 0.6% of AUM in October from 1.6%, over five times the average monthly move of +/- 20 basis points.”
“The Wall Street Journal reported that U.S. households’ allocations to stocks as share of total financial assets has just reached an all-time high. In 1968, this ratio recorded a peak of 30%. In March 2000, it set a new record of 38.4%. December 2021 brought a new high of 41.6%. In the second quarter of this year, U.S. households’ equity holdings reached 42.2% . It’s surely even higher now.”
Normally, the market completes a topping process when it concludes a 5-wave structure. While we are completing a 5th wave at many wave degrees, the final 5-wave structure seems to be taking shape as an ending diagonal. That means that we will not likely have the standard completion process we see in standard 5-wave structures, as it does cloud the analysis a bit. It is for this reason that I have been waiting for a break of support to suggest that a major top has likely been seen.
As I have said to many clients who ask me questions which I simply am unable to answer with certainty, I am but a simple analyst and not a prophet. Therefore, I must objectively follow what the market tells me based upon its structure.
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