There was enough buying climaxes in stocks this week to signal a short term top in the stock market.
This week 596 stocks printed a buying climax, which is the most since Feb 2018.
A buying climax is when a stock trends up to a 52 week high, then closes the week with a loss, which is a sign of distribution shifting from strong to weak hands.
A buying (or selling) climax is the result of surge in supply and demand.
The key theory of a buying climax is the exhaustion of demand as the last buyers enter the market.
The final surge of buying typically leads to p
For example, PayPal printed a buying climax this week. Shares of PYPL trended up to a new 52 week high, then closed down on the week. It’s a sign of distribution, as shares of shifting from strong holders to weak. Stocks like PayPal have benefited from people staying at home and buying things online. It was a leading stock with strong relative strength, until now.
Visa (V) is another example of a BUYING CLIMAX. Visa has been a leading stock with strong momentum and earnings growth, but it trended to a new high, then closed down.
UPS is another example of a BUYING CLIMAX from a leading stock as it printed a new 52 week high, but closed down this week. Not as strong of an example as above, but a buying climax nonetheless.
As stocks like UPS have benefited from the stay at home climate of rising deliveries, it’s obviously driven by companies like Amazon (AMZN), which happens to be another BUYING CLIMAX example.
Amazon trended to a new high, then closed down this week.
Costco (COST) is another example of a big winning stock that printed a new high during the recent euphoria for stocks that closed down this weak to print a buying climax.
Nvidia has been one of the most explosive momentum stocks this year. NVDA printed a new high, then closed -12% off its high this week.
The list of 596 stocks that printed a Buying Climax includes most of the recent leading momentum technology stocks like Apple, Adobe, Microsoft, but also financials like asset manager BlackRock.
The bottom line is: we’ve seen a period of euphoria, as measured by investor sentiment indicators like the Citigroup Panic/Euphoria Model, and now we’re seeing some blow off tops shift to buying climaxes.
I shared my observations of investor sentiment getting silly the week before in “The weight of evidence is becoming increasingly bearish for the US stock market.”
These quantitative indicators have a long history of signaling a shift in supply and demand, which suggests the risk level is elevated for the stock market.
We typically see a buying climax at the end of a bull market cycle.
Investors confidence the trend will continue results in complacency as to market risk. Their confidence the uptrend will continue drives them to ignore the risk of loss, so they don’t manage their risk or hedge exposure to loss.
Complacent investors believe the current trend isn’t going to reverse anytime soon, so they get caught off guard when it does.
Once they start taking on heavy losses, they may panic sell, adding to the selling pressure that pushes prices down even lower.
Risk averse investors should prepare themselves for an increasing probably of a downtrend in stocks.
This may be just a warning shot across the bow of what may be more selling pressure to come.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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