Though U.S. stock indexes continue to churn higher, a topping formation may be slowly emerging. It’s showing up in relative strength, as seen in the Relative Strength Indicator (RSI), a solid leading technical indicator we have found reliable to spot potential reversals. Right now the RSI is diverging from price in the indexes on the daily charts, which typically signals a market U-turn may be coming down the pike.
And underline the word “typically” at least twice. There’s never certainty when it comes to the stock market. But the RSI typically is correct, and while stocks have been on a great run, it’s firing an early warning shot across the Wall Street bow.
For us this means that while we’re still long the market in our active accounts, we will be slow to add any additional exposure only when the rewards far outweigh the risks, we will raise stops and thankfully take profits when offered, we won’t chase, and we will be quick to move to cash (which is paying rather nicely) while we continue to monitor the RSI over the coming days and weeks.
Know that a “top” is a process that can take several weeks, and with the end of the 2nd Quarter (when professional traders perform their customary window dressing to make their clients’ quarterly statements look better) and an upcoming holiday week is usually not where stocks make a turn. So while the stock market continues to be all sunshine, lollipops, and rainbows as we head into the holiday, know there is some downside risk starting to emerge. Trade accordingly, and have a great 4th.
The views expressed represent the opinion of Good Life Asset Strategies, LLC. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness.
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