Don’t fight these “frothy” markets, says Paradigm Capital

It’s been a tremendous run in the capital markets since the idea that rate raises are done took hold. But Paradigm analyst Aazan Habib says things may be getting a bit frothy, although he cautions that there isn’t much sense fighting the trend.

In a report to clients December 17, Habib said he thinks investors should stick with the uptrend as his research shows the breadth/momentum/risk appetite remains positive.

“Our breadth/momentum/risk-appetite/trend-following indicators each remain positive despite near-term overbought conditions,” he wrote. “AAII survey data is starting to show signs of froth with the Bulls-Bears spread at the top of its multi-year range, although active portfolio manager positioning (NAAIM Index) has further room to run before getting overbought,” he said. “We also note that period of greed can persist longer than periods of fear, so we do not see sufficient evidence to fight the uptrend.”

With most indices at historic highs, Habib provided some numbers to watch.

“The Dow Jones Industrial Average and Nasdaq are breaking out to new all-time highs while the S&P 500 is verging on doing so itself. The weekly chart measures upside potential toward the 5200-5400 zone on a breakout. From a tactical risk-management perspective, we would view a daily close below 4655 as the first sign that it may be time to trim tactical exposure.”

After last week’s Fed meeting, markets moved higher and began pricing in the idea that rates will next move lower, not higher.

“Markets view today’s comments as inching toward the dovish camp,” Jeffrey Roach, chief economist at LPL Financial, told CNBC.