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I remember it like it was yesterday. In 1994, I was 17 and visiting my dad in Florida. Life was great. The New York Rangers had just won their first Stanley Cup since 1940. The weather was perfect, and I was off for summer between college semesters. Pools, beaches, a carefree life – good times.
Then my girlfriend of two years blindsided me and broke it off. And it was hours before I was to fly back to New Jersey to see her. I was devastated but still made my 3:30 flight. I would be back by 6:20 if all went smoothly.
I should have known better. Somewhere over South Carolina, I was looking out the window westward and saw a lightning bolt strike the engine on the wing. I watched it burst into flames. The plane jolted and lurched. Oxygen masks dropped down. We all looked around thinking it was a mistake. Someone laughed. Then I saw an unconscious flight attendant being dragged and strapped into a seat. She must have hit the ceiling when the plane suddenly dropped. The stranger next to me did a Hail Mary, then assumed the crash position. It was surreal. The moment the cabin depressurized, my life felt like it was depressurizing with it.
We made an emergency landing in Charlotte, North Carolina. We waited in a hangar on the outskirts of the airport for a new plane. This was before cellphones. Alone and freaked out, I did what any 17 year-old boy would do – I found the prettiest girl I could. A kiss from Lucy somehow made everything better. When life gives you lemons ... I eventually made it home at 11 a.m. the next morning.
Look – we all know what's coming eventually. The stock market is whizzing to new highs. It's resistant to everything: contested elections, a blue sweep with negative tax implications, and a deadly pandemic. The clear call that stocks are decoupled from reality was Wednesday, Jan. 6. Protesters breached Capitol Hill forcibly for the first time in over 150 years. Peaceful protests were overshadowed by insurrection, violence, and death. Stocks couldn't have cared less. The Russell 2000 index closed up 4% that day.
Eventually, the market cabin will depressurize. I think we're getting close. On Dec. 20, I posted the following predictions based on MAPsignals.com data:
- The market went overbought on Dec. 2.
- The market will remain overbought until Jan. 13, 2021.
- The Big Money Index will peak on Monday, Dec. 21, 2020, at an S&P 500 level of 3,731.56.
- The S&P 500 will peak on Jan. 18, 2021, at a level of 3,828.50.
- The S&P 500 will then subsequently fall until Monday, April 19, when it will trough at 3,341.81.
Now I'm waiting for data to confirm loss of cabin pressure. Don't worry, because once it does, we have plenty of oxygen masks, and we've been here before. The signs are here though. Here's a quick recap of what the data says.
The Big Money Index Is Overbought
The Big Money Index is heavily overbought and starting to flag – a precursor to a correction. Markets have been overbought for five weeks – right in line with our 30-year historical average. MAPsignals data told us to expect this. We believe that the Big Money Index has peaked, which our data predicted would happen Dec. 21. So far, the actual peak reading of 91.9% was Dec. 18. So, our prediction was off by only one trading day!
This flattening indicates that buying is exhausting itself. Naturally, markets can stay overbought for incredible durations like last year for nearly six months!
Immense Stock Buy Signals
We also see late-stage irrational stock buying in week on e of 2021. Out of 11 sectors, 10 saw more than 25% of their universe bought in a big way, while three sectors saw more than 100% of their universe bought: materials, financials, and energy.
Stock buy signals are approaching the stratosphere.
Let's zoom in on Wednesday's buying here in red and yellow.
Typically, mega-buying like this while being extremely overbought means a warning sign: Things are frothy. Most buying was in discretionary, financials, energy, industrials, and materials … familiar strong sectors lately.
Massive ETF Buying
Epic exchange-traded fund (ETF) buying in an extremely overbought market historically signals a near-term bearish warning. Looking below, we see that big green ETF buying sticks usually align with near-term market peaks.
This is the pilot warning you that we may encounter turbulent air ahead. But you needn't freak out or assume the crash position. I'm not bearish in the medium or long term. Earnings and year-over-year comps should be great in 2021. But one look at the market's parabolic rise in the face of negative news tells us that we should all expect a correction soon.
I see a coming market pullback as a natural correction. When stocks get too lofty, they need to come back to earth. If you're itching to buy, I'd suggest waiting – my data tells me that better prices are likely up ahead in that turbulence.
Right now, extreme greed is in the air. Signs point to a near-term peak in the coming weeks. Our data predicted the Big Money Index to peak Dec. 21. It happened Dec. 18. Our data predicts a market peak soon. Put the oxygen mask on for yourself before you assist others. Prep your buy lists now.
We may lose cabin pressure, but if you're calm and collected, you'll get through it just fine. I've seen it many times in the market and once on an actual flight. Life handed out some lemons, and I took comedian Ron White’s words to heart: "I believe when life gives you lemons, you should make lemonade ... and try to find someone whose life has given them vodka, and have a party."
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: The author holds no positions in the securities mentioned at the time of publication.