Bearish Sentiment Pushes Dow Above 20K

Over the past 6 weeks we have repeatedly discussed that excessive “Bearish sentiment” in the marketplace favored a move above the psychological barrier of Dow 20,000 prior to any meaningful correction that “allowed” investors to climb on board the Trump Train.  On December 15th we said “Most investors are hoping for at least a 4 to 6% correction down toward Dow 19,000 before purchasing stocks. Don’t hold your breath.” ( https://execspec.net/trump-bull-market-stocks-futures/ )  [See the BarChart.com chart below: our call for ‘No correction’ began at the start of this 6 week sideways pattern]

Near the end of the Yuge! 2,000 point Dow rally blitz post Trump’s election we initially pondered a modest correction as the option traders sentiment entered typical Sell territory just below Dow 20,000. However, in mid-December we began warning there would be no correction since too many buyers that missed the rally were now anxious to invest in “any” correction. They were not asking for much. 4 to 6% was the common thread money mangers said to wait for…and they will continue to wait. Bearish Put option and Volatility Index buyers who wanted a correction pushed sentiment to mildly oversold levels without any meaningful pullback in stocks. Don’t expect option sentiment to be clear for the near term as traders are now totally confounded in underestimating the power of this rally. Our theme has been consistent in stating the need for a clear surge beyond Dow 20K prior to a 4 to 6% correction that so easily allows buyers to find bargain entries. In fact we would have been very concerned that the Trump rally was a flash in the pan and the economy was about to reverse downward had such a correction occurred. Now we can look for Dow 19,000 to 20,000 as a strong support zone.

It must appear surprising to most investors that market sentiment could be anything but excessively Bullish or optimistic with so many stock indices hitting all time record highs. Yet, the important short to medium term time frame sentiment has been too pessimistic as professional and amateur investors acquiesce to their emotional bias.

As this 6 week trading range approached today’s breakout we had narrowed our forecast to say that even a meaningless 2% correction would be difficult given the pent up demand that has been building on the sidelines. The quick upside target we have expected is for a quick push to the 2295 to 2305 zone on the March SP with potential for 2330 in February. Basis the Dow we expect 20,300 to 20,400 to offer strong resistance.

It may be helpful for investors to think of the stock market like a fox who will do whatever it takes to evade capture and fool the majority. When a surprise tidal wave of buying leaves so many on the sidelines, it’s logical to expect no meaningful corrections desired by the majority to join the rally, until the market is ready to fall further than anyone expects. Beware when the nice simple 5% pullback arrives, it may be a time to Sell!?   Investors remain 95% long equities basis the SP 500 Indec (SPY).

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