Where Have the Bulls Gone?

S&P500 daily at end of day

End of Day Update:

It was a record close for the S&P500 as we broke through the ever elusive 2,120. There was no real news driving this move, but it seems a lack of negative headlines is all we needed to push higher.

It is a powerful sign when the price-action diverges from what people think should happen. Many claimed this repeated stalling at 2,100 foretold of the rally’s imminent demise. The nuance they failed to account for is the difference between stalling and pausing.

Stalling is when the market stops rising on good news. Prices cannot continue higher when everyone who could be convinced to buy, already bought. Is that the case here? Are we topping on good news out of Asia, Europe, and the US? Are ragingly bullish headlines giving the last of the reluctant buyers the excuses they need to finally jump in? Hardly.

We find ourselves in the exact opposite situation with an endless stream of negative headlines. Looming European financial crisis, lowered earnings estimates, disappointing economic reports, crashing energy sector, we’ve seen it all. And yet here we are, at all-time highs. If this is what the market does with bad news, what is going to happen something good finally slips out?

The mistake many wannabe contrarian traders make is confusing price level with sentiment. Just because we are at record highs doesn’t mean the market is overflowing with bullishness. People scoff when I mention how bearish this market is. They cannot fathom how the crowd could be bearish when we are making record highs and they use this flawed logic to bet against the rally. Unfortunately, so many people hold this “contrarian” view that they are no longer in the minority. Doubting this strength has become the cool thing to do. The latest AAII sentiment survey backs this up, showing bullishness at a tepid 27% as compared to the long-term average of 39%. That is a stark contradiction to the widely popular assessment of how overly bullish this market is.

A resistance level can only hold a determined market back so long. We’ve been trying to break through 2,120 for four months now and if we were going to tumble lower, it would have happened by now. The smart money is sticking with this strength, at least for a little longer. We will reassess once we see the speed, size, and quality of the breakout.

Jani

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