Investment markets are cyclical, but it’s important for investors to know when they are at extremes. One indicator of an extreme situation is when there is high level of participation in the market over an intermediate or long-term duration. In a recent analysis from GodzillaNewz, we take a look at the current levels of participation and the implications for long-term investors.
Intermediate-term participation occurs when investors are heavily buying and selling within the timeframe of one to nine months. When the current participation levels are compared to the prior trends, we are seeing that the level is quite overbought. As an example, the S&P 500 has had an impressive long-term rally which has driven investors into the market and raised participation levels. However, what is decipherable from the data is that the current level of participation is quite high and suggests that investors are chasing momentum instead of long-term fundamentals.
Long-term participation indicates that investors have invested in equity markets for an extended period of time, usually at least one year. The level of participation in the markets is much weaker when we look at the long-term. This suggests that there could be a big shift in the market in the near future, as investors who lack conviction in the current market will start to exit.
In conclusion, the current levels of participation in the markets are very overbought and appear to be weak on the long-term side. This could be indicative of a shift in market sentiment and may result in investors deciding to exit the markets in the near future. As such, investors should be aware of the potential for a shift in market direction and consider how best to position themselves in light of the current investment climate.
