Where Have the Bulls Gone?

By Jani Ziedins | End of Day Analysis

May 14
S&P500 daily at end of day

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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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

joseph bauer May 14, 2015

Define a “little longer”!!!!!!!!!

    Jani Ziedins May 14, 2015

    There is a chance this consolidation could end in a climax top if we see large price gains following the breakout. If that’s the case we could see this bull roll over dead before the end of summer. But if the gains are measured and methodical, that bodes well for a strong finish for the year. Too early to say which is more likely.

Tony May 14, 2015

All things considered…don’t rule out fake breakout yet, breakout is not a breakout unless confirmed. Otherwise it’s a mere setup.

    Jani Ziedins May 15, 2015

    We’ve had 4 failed breakouts this year, eventually one is going to work. There is a reason technicians don’t talk about quadruple and quintuple tops. It’s because the longer we test resistance, the more likely it is we will break through it.

W2J2 May 15, 2015

One pattern which foretells a top is a parabolic up move.

    Jani Ziedins May 15, 2015

    Yep, if we jump 200 points in the next few weeks, it will be time to get out. The most sustainable move is a slow grind higher.

Jon May 15, 2015

The CEO of TD Ameritrade stated a couple of weeks back that the retail investor is essentially fully invested. Who are the reluctant buyers you are referring to?

    Jani Ziedins May 15, 2015

    All the people who sold over the last 5 months while we churned sideways. Big money isn’t as smart as most give them credit for. If you doubt that, just check their track records.

[…] market was going to crater, it would have done so already. At least that’s what Jani Ziedins of the Cracked Market blog believes. Instead, he says, the smart money is holding strong, waiting for the skeptics to […]

[…] market was going to crater, it would have done so already. At least that’s what Jani Ziedins of the Cracked Market blog believes. Instead, he says, the smart money is holding strong, waiting for the skeptics to […]

Mark May 16, 2015

I think you’re being a little naive if you think that one sentiment survey and the idea that if the market was going to fall it would have done so already gives the green light. There are a plethora of warning signs in this market and I wouldnt be surprised if it tops sooner rather than later. But hey, feel free to use me as a contrarian signal and go all in..

    Jani Ziedins May 17, 2015

    The more concerned people are, the more bullish I become. Over last 6 months the “smart money” has been expecting the global economy to collapse, but here we are. I only get scared is when people stop talking about warning signs.

    Unlike politics or religion, the great thing about the market is we will soon know without a doubt which one of us is right.

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