Are We in the Midst of an AI Bubble? Divergences and Technical Warnings to Watch

investing.com:

While the bulls remain entirely in control of the market narrative, divergences, and other technical warnings suggest becoming more cautious may be prudent.

In January 2020, we discussed why we were taking profits and reducing risk in our portfolios. At the time, the market was surging, and there was no reason for concern.

However, just over a month later, the markets fell sharply as the “pandemic” set in. While there was no evidence at the time that such an event would occur, the markets were so exuberant that only a trigger was needed to spark a correction.

“When you sit down with your portfolio management team, and the first comment made is ‘this is nuts,’ it’s probably time to think about your overall portfolio risk.

On Friday, that was how the investment committee both started and ended – ‘this is nuts.'” – January 11th, 2020.

As the S&P 500 index approaches another psychological milestone of 5000, we again see numerous warning signs emerging that suggest the risk of a correction is elevated.

Does that mean a correction will ensue tomorrow? Of course not. As the old saying goes, “Markets can remain irrational longer than you can remain solvent.” However, just as in 2020, it took more than a month before the warnings became reality.

While discussing the risk of a correction, it was just last October that we discussed why a rally was likely. The reasons at that time were almost precisely the opposite of what we see today.

There was extremely bearish investor sentiment combined with negative divergences of technical indicators, and analysts could not cut year-end price targets fast enough.

What happened next was the longest win streak in 52 years that pushed the market to new all-time highs.

The last time we saw