Since investors have become increasingly optimistic over the past few weeks, many have begun to question the current stock market strength of certain markets. In particular, intermediate and long-term participation levels have been a point of contention, as the current market rally has pushed many of these levels to dangerously high levels.
Intermediate-term participation levels, which take into account activity over a period of weeks or months, have been particularly overbought since the beginning of 2021. Several indicators have signaled that these levels are weakening, leading to a potential pullback in the near-term. This could lead to choppy and volatile market conditions over the near-term, as investors take profits and search for new opportunities.
Long-term participation levels, which consider activity over a period of months, quarters, or even years, have also been weaker than normal. Despite many indicators pointing to potential bearish activity, the markets appear to be ignoring these warning signs and maintaining their current bullish sentiment. This could be dangerous, as long-term levels are traditionally better indicators of future trends.
An in-depth look at both short-term and long-term participation levels can help investors determine their current positioning and make changes accordingly. Overbought intermediate levels may signal a short-term pullback, while weak long-term levels may alert investors to bearishness in the next several months. Knowing these levels, and acting quickly if necessary, can help investors protect their portfolios and potentially benefit from market movements over time.