Why the bears are wrong

End of Day Update:

The S&P500 slipped for the fourth-time out of the last six-trading sessions and lost ground seven out of the last eleven-days. As bearish as that sounds, you cannot measure the percentage decline without using a decimal point. When looked at that way, this has actually been a bullish couple of weeks. All these days of selling can do little more than knock us down a fraction of a percent from all-time highs. A market that refuses to go down will eventually continue higher.

But many traders are not seeing what I’m seeing. Bearishness on AAII’s sentiment survey jumped nearly 8-points this week and sentiment on StockTwit’s $SPY stream is in free fall and near two-month lows. Who’s right? The market’s right. Not because it is smarter than we are, but quite literally because it sets the prices we buy and sell at.

But there are very real supply and demand reasons why it is better to stick with the market here. People trade their outlook. Most of the traders who have grown more bearish over the last few weeks have been the ones selling and causing this modest bout of weakness. But now that they are out of the market, who is left to sell? Given the trivial declines, not many owners have joined the selling. While conventional wisdom tells us to fear complacency, the thing it forgets to tell us is periods of complacency last far longer than anyone expects. This bull market will end like all the ones that came before it, but this price-action is telling us it isn’t ready to go yet.

One thing most of us can agree on is sharp selloffs are breathtakingly fast. But here we are, nearly two-weeks into a “selloff” and we have fallen little more than a handful of S&P500 points. If we were standing at the edge of a precipice, the last two-weeks of selling would have fed on itself and we would already be dramatically lower. If the bears couldn’t break this market by now, then they are not going to break it. This is not a set-it-and-forget-it market, but we need to do what is working and right now that is buy-and-hold.

When will that change? Good question. It will change when something new and unexpected happens. Traders who fear a Trump presidency or rate hikes have long since abandoned this market. The next time Trump makes an incoherent 2am Tweet, don’t expect the market to react because everyone who cares about that stuff already sold. Same goes for the next rate hike. Anyone who fears rising interest rates is long gone and they no longer have a vote in what the market does next. That is how bad news gets priced in and why it stops mattering. Ignore what everyone else is talking about because it is already priced in. Instead stay on the lookout for the obscure thing no one see coming.

Not long ago I thought this market would tumble when the GOP failed to cut taxes as aggressively as the stock market hoped, but given how little it reacted to Trumpcare’s appalling failure, the market is telling us it doesn’t care about politics. You’d have to be living under a rock at this point if you still had faith in Congress’s ability to get something done. If everyone expects the tax legislation to fail, then it won’t matter to the market when it does because it is already priced in. Maybe these things will start mattering at some point, but this is not that point.

That said, this is the most nervous I’ve been since the 2009 bottom. Something is coming. I don’t know what it is or when it will happen, but I know something will be worse than most people are prepared for. The market’s half-full outlook has given us this smooth ride higher and it is foolish to fight what is working, but we should be standing next to the doors so we can be one of the first to get out when things turn south. Stick with this bull market for the time being, but be on the lookout for the thing no one sees coming.

Jani

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