The first thing you'll notice is the decreasing volume as markets made all-time highs. That's bearish news… it means this recent rally is being driven by retail investors and not large, institutional investors.
They likely don't believe this rally will continue. And as a general rule, you want to be on the same side as the "smart money," not retail investors.
And the indicator at the bottom of the chart is the Relative Strength Index (RSI). It's a momentum indicator that does a good job of spotting when the market is overbought or oversold. As you can see, soon after the indicator reaches the 70 level, more often than not, the market pulls back.
It's not a crystal ball, though. And markets can remain overbought for weeks and even months at a time. As the economist John Maybard Keynes said,"markets can stay irrational longer than you can stay solvent."
But it's good to take a step back once in a while to see the bigger picture. And what I see right now is a market that's more likely to head lower than higher. Does that mean I won't be trading stock long? Of course not.
Instead, I will trust that the systems I've backtested with years of stock data and hundreds of trades will work as designed. And because I know pullbacks do happen, I account for them when I build my systems.
My Momentum Factor system, for example, goes long a "Hedge ETF" and high-quality stocks likely to breakout higher.
Over the long-term, the system has been extremely profitable. It's generated a 1,316% return since 2012. But it's how well it performs even when stocks fall that's really impressive.
In late July and early August of this year when markets fell about 6% in a few days, most of my long positions were in the red. But because I was also long the Hedge ETF — which made me an insane 588% gain — I still made money.
But I know that most individual investors don't prepare for pullbacks. So let me remind you that now is the time to look at your portfolio, when markets are still relatively high, with a critical eye.
Are you only long stocks? Is you're portfolio diversified enough? Do you have hedges in place?
Just because markets have been calm and marching higher, there's no reason to believe that will be the case next week or even tomorrow.
If you're afraid of what a market pullback -- or worse -- might do to your portfolio, I urge you to check out this training. I give you all the details of my Momentum Factor system, and how I use a hedge ETF to make money when stocks fall.
I have a feeling this information will be invaluable to you over the coming weeks...
Roger Scott
WealthPress
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