Stocks began the new year with a positive outlook, registering slight gains on Friday, a continuation of the strong performance seen in the previous year. However, Ned Davis, founder of Ned Davis Research, has issued a cautionary note for investors, suggesting that they should proceed with care.
Davis highlighted the current reading of his firm’s Big Mo Multi-Cap Tape Composite, a benchmark for overall market momentum, which stands at 66.36. This figure is significantly below last year’s high that surpassed 80. While he noted that the Big Mo Tape remains on a buy signal established on May 2, 2025, he expressed concern about the cyclicality and secular trends which he considers to be extended.
Should momentum begin to decline further, Davis warned that it could trigger a sell signal. In his report to clients, he pointed out additional potential warning signs for investors, including rising margin debt. As of the end of November, margin debt for the S&P 500 had exceeded $1.2 trillion, and the rate of change over the past 15 months has entered what he termed “excessive speculation” territory.
Despite acknowledging various indicators turning towards sell signals, Davis reassured that the overall trend is upward and stated that their firm is “mildly overweight stocks” at present. Nonetheless, he emphasized the importance of being prepared for a potential downturn, highlighting the maturity of the current bull market.
Further complicating the landscape for investors are rising geopolitical tensions. Recently, the U.S. ousted Venezuelan leader Nicolas Maduro, a move that could have far-reaching implications. While market stability was evident on Monday, it remains to be seen how escalating concerns in the geopolitical arena might impact equity markets moving forward. As the situation develops, investors are advised to remain vigilant and assess their positions carefully.
