There is a saying that only price pays, but sometimes price is not a the ultimate leading indicator. In financial markets, everyone tries to be one step ahead of the competition and is constantly looking for an edge. Often, the only edge you need is to understand your own and your fellow investors biases and incentives.
There are varisous ways to gauge the health of the market and get prepared for its next move:
– breadth (number of stocks on the 52week high list, percentage of stocks above their 200dma…);
– leading sectors (tech and financials and consumer discretionary have led this rally. Probably they will be the ones to go first too, when the market benchmarks turn south);
– asset classes correlations (is money flowing to the perceived safety of treasury bills and notes or to equities and high-yield bonds);
– sentiment (extremes are contrarian indicators).
These are all valid and potentially useful approaches, but there is one that I put first at this point of time. The price action in liquid, high-ticket stocks. Here is why.
$XLK (technology) is already up 19% YTD, $XLF (financials) is up 22%, $XLY (consumer discretionary) is up 15%. If you haven’t been at least 70% invested in U.S. equities, the odds are that you are underperforming. By mid March, many money managers realized that they were exactly in that precarious situation. As usual, there was only one cure for their ills – high-ticket stocks. Stocks like $AAPL $PCLN $GOOG $ISRG $CMG. Only they provided the needed liquidity to get meaningful quick exposure to equities. And they were bought.
Many of the mentioned names are extended for sure, but it is never wise to guess a top and jump in front of a freight train during a bull market. Irrationality (aka good mood and liquidity) often trumps the patience of even the most stubborn ones. Sometimes unnecessary sophistication leads to overthinking and underperformance as often being early means being wrong.
At this point, almost any institution owns some if not all of the above mentioned high-ticket stocks. They are my leading indicators. If I see any signs of churning (high volume and little price progress) or distribution (several negative big-range, high-volume days) in them, I will seriously reconsider my current view of the market.