Inflection points such as the record October stock market peak and the panic low in December are the important milestones we endeavor to navigate successfully through this massive 10 year Bullish wave in US stocks. During the past 7 weeks of surging equity prices we have identified temporary pause points for minor 2% corrections, but continue to see little prospect of a major inflection point. The persistent upside move off the spike bottom at Christmas has left even the Bulls skeptical of the short term as they struggle to find a bargain buying pullback in what appears anecdotally to be an overbought market. Readers may recall throughout 2017 we noted the extreme low volatility and lack of corrections which we forecasted that would restrain Bulls from acting upon their upside outlook. The higher prices rose in 2017, the more cynical investors became, which maintained a healthy level of sideline cash to sustain the rally. While we don’t expect such a relentless 14 month run for the roses without a breather this time, the 2019 psychology thus far has paralleled 2017’s Bullish frustration among investors with rising optimism coincident with an inability to invest their dry powder funds due to a lack of corrections.
Technical overbought Sell readings are elusive despite the powerful 20% jump in stock indices since Christmas. Although imprecise, momentum extremes have arrived this week which imply a top that serves as a ceiling for stocks for several weeks to 2 months is due. Likely an announcement near March 1st of a China Trade Deal postponement or worse will trigger this corrective period in the March – April time frame. Given the November resistance in the low 2800’s basis the SP 500 Index and 26,000 – 26,280 basis the Dow, we anticipate that any further probing to new highs here will hit overhead price resistance and possibly the normal technical overbought readings we need for a correction to ensue.
Many sentiment measures are surprisingly below the over optimistic extreme zones currently, despite the strong equity accumulation phase. However, option trader sentiment indicates that Bullish Call buying activity is approaching last years extreme in a similar pattern. This should present an ideal zone for traders to take some profits and raise cash before month end. Small Investors sentiment (AAII) is still neutral holding beneath the more modest November 2018 peak and well below previous record high last October. To get AAII and the CNN Greed gauge to clear overoptimism levels, stock indices require even higher prices to generate a more important medium term peak. (Chart below date range ends 02-18-19)
The Bears have been selling this market all the way up and the Bulls have struggled to find enough corrections to become fully invested. Even our ExecSpec Bullishness in 2019 had initially looked for a pause in February, but we quickly shifted to a more sustained uptrend with less tradable ~2% dips. The absence of extreme overbought technical indicators warning of deep corrections and the sentiment wall of worry from Bulls and Bears allow room for further gains this month. Without an excellent China trade deal being confirmed in early March, we suspect that a longer price pause in stocks is likely. The degree of correction will depend upon news from trade and the technical gauges that reach overoptimism levels should prices move higher. March and possibly April should diverge from the January – February equity euphoria, assuming that a China trade agreement is not approved. The concern for Bulls continue to center on negative influencers not yet discounted, such a No Deal expectation with China or worse than expected earnings and GDP estimates below 0% and 1.5% respectively for the first quarter.