Are Markets Beginning to Top Out?

Institutional activity for stocks points to lower prices

Stocks are showing signs of weakness. This could be early signs of a pullback on the horizon. One easy way to see a change in market sentiment is to look at institutional accumulation/distribution levels. When you see action like that alongside a pullback in stock prices, it strengthens the case for lower prices ahead.

Key Takeaways

  • Stocks are showing weakness.
  • Big Money institutional players appear to be lightening risk, according to accumulation/distribution analysis.

Forecasting is tough. Funnily, we rely on it but bemoan it when it fails to work. That's the nature of predictions! Now, I have a pretty intricate way of looking at market internals. But for those of you out there that want to practice at home, consider looking at the accumulation/distribution signal.

Here's a chart of the iShares Russell 2000 ETF (IWM) where you can try and follow along. You can see that, as the exchange-traded fund (ETF) is falling, the accumulation/distribution levels are falling, too.

Chart showing the share price performance of the iShares Russell 2000 ETF (IWM)

If history is any guide, we could see further deterioration under the surface for stocks. And to take it a step further, I've used analysis in the past that is similar to make educated forecasts.

Predicting market tops and bottoms is a fool's errand, right? I've tried it several times, and so far, it has been mostly accurate. And it was all based around data.

No one else is going to beat the drum … so I might as well, right? Consider these data-based predictions:

  • On Jan. 24, 2018, my data signaled that stocks were overbought and due for a pullback. The market peaked two days later. 
  • I also came very close on timing and level of the subsequent bottom in February 2018.
  • In June 2018, I warned of an overheated market and to expect a market drop.
  • The day before the market trough on Dec. 18, 2018, I said, "We're 90% done with the selloff in prices, and 75% done with the selloff in terms of time. That means we're close to a bottom." 
  • May 31, 2019: Data predicted the exact date of the bottom of that selloff
  • Data indicated to expect summer volatility right at the beginning of the August 2019 selloff
  • January 2020 alerted of an overbought market and pending selloff.  
  • Oversold signal in late March: Data pointed to a high likelihood of a rise in prices.
  • Data also forecasted market weakness heading into the 2020 presidential election and strength immediately after.
  • December 2020: My data said that we were overbought.
  • I predicted the S&P 500 to peak on Jan. 19, 2021, at a level of 3,828.5. So far, it peaked on Jan. 25 at 3,855 – only four days and 1% off target.

Will the current warning signal guarantee the beginning of a downtrend? No. Nothing is guaranteed in markets. Kind of like predicting the weather isn't 100% … speaking of, weather forecasts are actually quite accurate. According to NOAA SciJinks, seven-day forecasts are about 80% accurate, while five-day forecasts are 90% accurate. For 10 days or more, accuracy drops to about 50%.

Predicting weather is sophisticated. I could tell you I lick my thumb and hold it to the wind to find major pivot points. But I live in data. I rely on big money buying and selling. When buying becomes unsustainable, expect markets to fall.  When selling is out of control, expect markets to rise. 30 years of data taught me this.

Jan. 27 saw the highest trading volume ever. My internal metrics confirm. That screams of big money exiting stage left. So, what should we expect now? 

I believe that a healthy pullback is underway. Don't worry though – all markets need to reset. This won't start a bear market; it will just serve to vent steam for an overheated market. It's healthy and necessary. 

The bottom line is that, if you hold great stocks, they will always be great. At least history says so. All stocks come under pressure at some point. Great ones tend to rebound fast and furious. 

My outlook remains bullish on stocks this year, but things are overheated now. Froth is in the system and needs to get flushed out. Expect some chop, but earnings are great, and economies are on the verge of reopening. Vaccines are here. It should be a great year.

A look back at data allows me to look forward. Søren Kierkegaard understood the power of both: "Life can only be understood backwards, but it must be lived forwards."

The Bottom Line

We (MAPsignals) are bullish on high-quality U.S, equities in the long term, and we see market pullbacks as areas to pick up great companies.

Disclosure: At the time of publication, the author holds no positions in the securities mentioned, but that could change in the coming days and weeks.


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