Difference between now and Jan 2018

I don't like to get overly fixated on ST sentiment but given the straight line up action of the market lately, I've been watching for extremes which could indicate a turning point of some sorts. AAII sentiment is one of a handful of indicators I look at. Last week I mentioned that it was not showing a bullish enough extreme to suggest a top was in. This week we saw a bull bear ratio climb a bit higher to 1.8. I would say that this is still not a bull extreme but high enough on a stand along basis to make me neutral and avoid chasing the market higher. We continue to see non-existent fund flows into the equity markets overall. The only thing we've been seeing on that front is money getting recycled from mutual funds to ETFs but no new money has been going to equities, it's been going to bonds. This to me is truly amazing. Since December 2018, investors as a whole have been fleeing the equity market. I can't for the life of me envision a bull market peak until dumb money piles back into market en masse and we haven't even begun to see the people get back into the market in ANY way, yet alone en masse! This is a very big feather in the bulls cap long term.

Let's go back to January 2018 which is what a lot of people are comparing this current ramp in the market to. There are huge differences in investor behavior, the media narrative and economic conditions. Back then, high bullishness was clearly evident as indicated by huge equity fund flows, AAII investor sentiment and the general media narrative  signing praise of the "global synchronized growth" that was taking place. This time around, despite the market making all time highs day after day for months, public sentiment is only mildly bullish via AAII and agnostic via fund flows (which carry more weight as it tells you what people are actually doing with money). The only extremes out there are in the options market and hedge fund community which are indeed high enough to fuel a correction as they are weak longs and will bail easily. The media is nowhere close to the "blue skies ahead" narrative of January 2018. Although there is less concern about a recession, the media is nowhere close to being optimistic as they were in early 2018 given the global economy continues to be generally stuck in 2nd gear. So, all in all it would appear that when we do get a correction in the market, it will not be as severe as what we saw in 2018. I would speculate that once this ramp in over we could see a long, drawn out consolidation phase whereby the market doesn't suffer more than a 10% drop from the high. That's just my best guess of course. As usual, my expectations can change as things unfold.

A couple of notable things are the weakness in oil and strength in bonds which could be indicating a further softening economy or at the very least one that is still stuck in 2nd gear. If these concerns gather steam it could lead to a correction that has some staying power. As I type this the market appears to be selling off on fears of the conoravirus spreading. If that's the case I don't think such a correction  would be long lived. 

Bottom line here is that if you're an investor/trader it's a tough spot to be in right now if you have new money to invest.  In  my opinion the market is too extended to go long but there's not enough extremes to go short in a way that you can do so with conviction. If this dip we are seeing gathers steam I don't think it will last more than a day or 2 if it's due to the coronavirus as this is a weak excuse for a sell off. Given the amount of weak longs out there (hedge funds) though, it could end up being a sharp dip but a short lived one... it's a really tough call at this point.