Market Leverage Reaches New All-Time Highs As The Excess Phase Rally Continues

By TheTechnicalTraders 

– A recent Forbes article highlights the incredible increase in market leverage since the start of the COVID-19 crisis.  There has never been a time in recent history where market leverage has reached these extreme levels.  Additionally, highly leveraged market peaks are typically associated with asset bubbles.

The easy money policies and global central bank actions have prompted one of the longest easy money market rallies in history.  Historically low interest rates, US Federal Reserve and global central bank asset-buying programs, and extended overnight credit support have prompted some traders and investors to move into a more highly leveraged position expecting the rally to stay endless.  Although, the reality of the global market trends may be starting to cause traders and investors to become a bit unsettled.  Precious Metals, Utilities, and Bonds have all started reacting to perceived fear related to this extended bullish rally trend recently.

My research team and I believe the current market rally will likely continue as capital shifts away from extended market sectors.  We believe the transition away from the new US President and the new policies associated with this change of leadership has already started taking place – which is why Precious Metals, Utilities, and Bonds are starting to trend.  Yet, we believe the momentum behind this current rally is likely to extend through the end of April and into early May 2021.

Custom Volatility Index Shows Bullish Trending & Price Volatility Risks

Our Custom Volatility Index chart, below, shows the US markets have just recently rallied back to previous bullish market trending levels (above 13 on this chart).  Once this Custom Volatility Index reaches these levels, we normally expect two market traits to continue.  First, we expect bullish trending because the Volatility Index above 10~11 strongly suggests an extended bullish trend is in place.  Secondly, we expect moderate price rotation to take place after the Volatility Index reaches levels above 13~14.

It is very common for the Volatility Index to move above the 13~14 level in extended rally trends.  Yet, it is also common for the markets to rotate or retrace after reaching these levels.  Therefore, this Custom Volatility Index chart shows the US markets have moved into extreme bullish price trending and has already reached a peak level near 15 – which suggests we can expect some moderate price rotation within the next 3 to 5+ weeks.

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Whenever the US major indexes trend higher in longer-term extended trends, the Custom Volatility Index typically stays above 10~11 and continually attempts to rally above 12~13.  The “Peak Volatility Channel” on this chart highlights areas of extreme peaks in the markets.  When the Custom Volatility Index reaches this level, price becomes more likely to rotate or retrace a bit before attempting to move higher.

Smart Cash Index Shows Global Markets Need To Break Above 210 TO Begin A New Rally Phase

Our following Custom Smart Cash Index shows the global markets have been struggling to move higher over the past few months.  Even though the US markets have attempted to rally to new highs, the Smart Cash Index chart shows this recent rally has not been seen in the global markets.

My team and I believe the next rally phase in the markets must initiate with the Smart Cash Index chart rallying above 210 and representing a moderately strong global market push higher throughout the May/June 2021 time span.  If the Smart Cash Index fails to move above the 210 price level, the we believe a moderate price correction may be setting up for May or June 2021 where the US markets may move moderately lower, attempting to retest recent support, then begin another rally attempt.

Currently, the global stock market and financial system leverage may be an unknown catalyst for some type of future market movements.  The Forbes article suggests these new all-time high leverage levels are likely the result of global central bank policies where traders and investors believe the central banks will continue to support the markets indefinitely.  As much as we would like to think this may be the case, the reality is that, at some point, normalization will take place in the global markets and that presents an ominous deleveraging event in the future.

We are watching how the market’s sectors are shifting trends and how some of the strongest sectors are shifting and weakening over the past 60+ days.  For example, the Russell 2000 had been one of the strongest market sectors up until about 2 months ago.  Now it appears to be trading in a sideways trend – attempting to move back into a bullish price trend.

Our research team believes traders and investors need to be prepared for quickly shifting sector trends over the next 6+ months as this highly leveraged global market event plays out.  Our research suggests a price rotation event is near and the global markets are still trending in a moderately strongly bullish trend. The strongest sectors are going to continue to be the best performers over time.  Being able to identify and trade these sectors is key to being able to efficiently target profits.  You can learn more about how I identify and trade these sectors by registering for my FREE course here.

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Enjoy the rest of your Sunday!

Chris Vermeulen
Founder & Chief Market Strategist

TheTechnicalTraders.com