MARKETS SPECTATOR: US pullback in the pipeline

Reliable indicators – the 50-day moving average and 50-day high rate – are pointing to a US pullback. With the market in a longer term uptrend, it will be the time to buy.

Markets have had a very strong run over the last few months, especially in the US where the S&P 500 is up more than 10 per cent.

Recent research from Bespoke Investment Group shows that 90 per cent of S&P 500 stocks are trading above their 50-day moving averages. This is the highest reading seen over the last year and it’s only the sixth time it has surpassed the 90 per cent level since the beginning of the bull market in 2009.

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Source: IndexIndicators.com

While there’s no such thing as the perfect indicator, it’s pretty good at indicating when to approach the market with caution. And it looks like we’re at that point now.

Another indicator that confirms this view is the percentage of S&P 500 stocks trading at 50-day highs.

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Source: IndexIndicators.com

It looks even more ominous. Over the last three years we can see that the percentage of S&P 500 stocks at five-day highs (red line) has traded three standard deviations above its mean on only four occasions. Every time it did so, a pullback followed pretty quickly.

Whilst I’m bullish in the medium to long term, the market is looking very overbought on a short-term basis. If this proves correct and we do get a pullback, it will likely prove to be very good buying.