Potential Turbulence Ahead
Igor Manukhov - May 24, 2024
Market participation and slowing momentum suggest potential short-term turbulence ahead. Consider using market weakness as a buying opportunity.
May has been a remarkable comeback month, with the market reaching an all-time high. However, beneath the surface, there has been a deterioration of participation in this rally. The red line in the middle panel represents the Bullish Percent Index (BPI). This indicator measures how many stocks on the market carry the rally. It fluctuates between 0% and 100%. Notice how despite market making an all time high, the BPI failed to surpass previous high (indicated by the pink line), signifying that fewer stocks carried this most recent rally.
In addition to that, momentum has been slowing. The Moving Average Convergence Divergence (MACD) is one of the most commonly used momentum indicator that rises with increasing momentum. In a strong bull market, you want either increasing or steady momentum. Notice how it also failed to reach a new high despite the market’s ascent. I have marked with green lines previous instances of these divergences, suggesting a high probability of turbulence ahead.
That being said, we are still in the middle of a bull market. Therefore, I would use any market weakness as a buying opportunity. Notice how strongly markets tend to rebound after short-term corrections.