Too Many Bears

According to Investors Intelligence survey of Newsletter writers, optimism is surging into the upper echelon of the most positive outlooks over the past 40+ years. With Bullish opinions testing 63% of those reviewed, we are already up against record levels typical of the start or the end of a Bull market in stocks. This data is used as a contrary opinion metric indicating overbought and oversold conditions of investors. 

Advisors claiming to advise a more fully invested stock exposure for a Bull market doesn’t always reflect reality. Advisors quickly shifted from neutral just before Trump’s November election to rapidly growing extreme optimism in recent weeks, but the speed of the initial stock market surge has left actual portfolios in cash and waiting. The more nimble Option Traders can reflect changing sentiment more precisely than Newsletters. Below we observe the heavy pessimistic Put option buying extreme just prior to Trump’s surprise election. As stocks frantically rose, Call option purchases hit overly optimistic extremes in mid-December. In late December we wrote about the renewed surge in Put buying as a sign that stock investors had not only missed the rally, but were betting on a correction before they could join the Trump train. It was this clear majority of sentiment waiting for lower prices that encouraged us to say that prices would not correct more than 2% and to expect higher prices first. In the 6 weeks since then prices have persistently edged higher into record territory. Even today the Dow, Nasdaq and SP 500 Index are touching new all time highs with increasing levels of “pessimism” instead of the typical euphoric response.

As we have stated, normally Bullish Call option buying increases along with stock prices until extreme lead to a reversal. In 2014 we see a similar response when investors missed the initial surge in equities. Eventually this running Bull market, coincident with rising skepticism, has to correct to move this sentiment metric toward normal alignment with price action. 

Essentially, until prices move well above the December/January congestion area, we should expect investors to continue waiting on the sidelines until a more profound economically Bearish news event can shock prices lower. Expect higher prices near term and when a >4% price drop occurs, expect more (8 to 10%). For now, there are still too many Bears and higher prices are more likely than sharply lower, barring an exogenous news event. Perhaps stocks are breaking out today for yet another leg higher. SP 2330’s and Dow 20,400’s are the next targets. We remain 95% invested in stocks basis SP 500 Index.

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