Sentiment, Sentiment, Sentiment

End of Day Update:

Stocks exploded higher as the S&P500 retook the 50dma and 2,050 technical level. While the price move was impressive, a similar surge in volume was conspicuously absent. That tells us the rise was more due to a reluctance of owners to sell than a huge wave of buying.

Sentiment’s been swinging just as wildly as price. Stocktwit’s SPY sentiment went from 68% bullish in late December to 38% earlier this week. Along with price, it bounced back decisively to 50% in recent days. AAII investor sentiment has been on an equally volatile ride, up 10% last week and then down 10% this week. The lag in the AAII poll means most of the responses came before Wednesday and Thursday’s impressive gains. If the survey was real-time, I’d expect a similar resurgence in bullishness as we saw on Stocktwits.

Another interesting nugget from AAII is while sentiment is down, equity allocations in December haven’t been this high since 2007. It appears individual investors haven’t owned this much stock since the top of the last bull market. Contrarian or not, that should give anyone pause.

Friday morning we get monthly employment, but few are worried about it. That means a decent result is already priced in and we shouldn’t expect big gains due to a strong report. Unfortunately the opposite is not true. The complacency about employment means we are vulnerable to the downside if the market is blindsided by anything unexpected.

Personally I expect another respectable employment number to follow the equally impressive US GDP we’ve seen. In the United States, everything looks great and we have little to be concerned about. But that is exactly what makes me nervous. Bull markets run out of gas on good news, not fear and anxiety.

Between the bullish equity allocations, general sense of wellbeing, and increasing volatility, that is enough to make this buy-the-dip guy think twice about buying this dip. This time feel different. While we could easily make new highs in coming days, it just doesn’t feel like the risk/reward is on the dip-buyers side anymore.

Jani