The Worst Time To Buy Stocks

The stock market will probably be making a new high today.  If we put money into stocks, we could very well make money.  I could have written this post a week or two ago.  The thing a rational trader needs to understand is that tradeable assets do not stay in an extreme overbought state forever.  Assets always revert to their natural state...… back to their average. 

​Lets take a look at the stock market.  Stocks right now are at what I would call an extreme level.  In fact, if you look at how stretched the stock market is above the 200 day moving average, we are now at the highest level since January 2018 which ended very badly.  In fact, even levels that were much milder than where we are today ended badly.

The 5 year weekly chart would also show that we are at such a point as previous extreme tops.

The timing is the difficult thing to factor in but eventually, we will certainly go from a level of extreme overbought levels back to what one could consider average.  It always does eventually.  Who is buying stocks at these levels?  Dumb money traders.  We really don't want to be dumb money traders.

Medium term risk levels for stocks are high according to Sentiment Trader.

Moore's Research had several buy stock recommendations back in October and November, but they do not have any for the month of December.  We could see stocks move higher however through the end of the year into the beginning of January.  It is a suckers bet however to be pouring money into the stock market.

I am not recommending that we short stocks.  Shorting the stock market can be very difficult.  If you wanted to short stocks, I would recommend buying puts instead.  Probably the more sensible thing to do would be to keep our eyes on assets that have tremendous potential from levels considered much closer to average such as Bonds and Gold which should rebound once stocks drop.

Just today, the 30 year bonds have reached the 200 day moving average.  There is not any sort of buy signal yet, but we are much closer.  

The weekly bond chart shows that bonds could drift a bit lower, perhaps as low as 153 where the 200 week moving average is.  Weekly RSI and Stochastic readings are just now reaching oversold levels.

​A word of warning here is that there is a strong negative seasonal correlation ahead with bonds.  Bonds perform the worst in Feb, March and April.  We would want to lock in a profit quickly with a stop.

Gold can and does go up when stocks go up but gold has also declined since August while stocks went up.  Gold can certainly catch a good bounce once stocks begin their decline.  I believe gold completed its intermediate cycle decline back in November and is enduring a difficult bottoming process.  Once gold breaks higher out of this coil we should be back to 1560 in no time.  Once we have a true break above the red colored IC Trend line, we will have confirmation that a new Intermediate Cycle began on November 12.

Gold has already satisfied requirements to be considered a new IC according to previous ICL's.

So the time between now and the end of the year will be crucial.  I am not sure the positions we are already in will move until the new year starts but once they go, they will go big.  In the mean time, it is important that we keep our heads and not do anything dumb and preserve capital.