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. 

Relentless ramp

The market has been on a seemingly non-stop run which has even the bulls feeling uncomfortable. I was clearly wrong on expecting a pullback.  Here's my observations on the sentiment front which is fascinating. The option traders/hedgers have fully given up this week so far. The put/call ratio has been very low even when the market had intraday reversals. Usually you would see the put/call ratio perk up when that would happen which would indicate a certain degree of top picking but not this time. Option traders have fully thrown in the towel and have been buying calls relative to puts hand over fist. AAII sentiment has perked up this week with bulls outnumbering bears by 1.5 to 1 ratio. I gotta tell you though, that's not high enough to give a contrarian sell signal given how strong the market has been. It seems like AAII folks have only begrudgingly been turning bullish. Meanwhile equity fund inflows continue to be mind boggling non- existent and that continues to support the LT bullish case. What's it going to take for people to get back into the market?  DOW 50K?  Last time we had a melt up like this was q4 2017 and fund flows were pouring in.

So, we have a weird case here where the market is very overbought, weak longs have been getting in but there's room for even more weak longs to come in as there is plenty of sidelined money that can capitulate and buy in making this market climb relentlessly further still. It's tough to bet on this though because after a parabolic rise typically comes a parabolic fall and if you get caught holding the bag you will get spanked. But you'll also get spanked trying to pick tops in such a market as well which has been the case for many traders as I can tell by the sarcastic, scoffing comments I see on twitter. Best thing to do at this point might be to just watch the show and wait for a better pitch, but I gotta say, benefit of doubt goes to the bulls in the short term until we get more extremes from AAII and the like.

Consensus view is modest optimism for 2020

This is the time of year where I like to read and listen to market forecasts by the "experts" about what's in store for the market in the year to come. From what I gather, I get the sense of modest optimism at best. The expectation is for modest GDP growth and still low bond yields that should see the US 10 year trade in a range from about 1.8% -2.2%. I get the sense that recession fears have dissipated but are not totally gone as there is still lingering worries about trade tensions and political risks. There's also still the strong notion of  the"late cycle" stage of the market we are in and that keeps the herd sensitive to negative events. So although optimism is building, the majority are still watching for that bear market pot to boil and that's contrarian bullish for the market in the LT. In the ST though, there are concerns.

I've seen indicators showing that long exposure from the hedge fund community rapidly increased in December which was the complete opposite of last year when markets were tanking. These clowns are weak longs and I bet were pretty much forced to buy as the market broke out due to FOMO. But mark my words, they are going to bail en masse at some point because deep down, they don't believe in the bull market. That's probably going to cause a 3-5% correction at some point within the first 3 months of the year if I had to guess. In my last post I mentioned that I expected to see the market cool off, but it hasn't yet probably because of continued top picking behavior as evident from the ST trader types and hedgers in the options market. I had thought that maybe they had given up but it turned out it was only for a day. At some point though,  they will give up for good and when they do the market will be ripe for a rug pull to clean out the weak longs that appear to be in the market right now. But this is all ST talk. LT the conditions that I expect to see when the stock market is at the ultimate top will probably look like this:

1. The global economy will appear to be in great shape or at least well on the mend
2. The investing public will have returned en masse as evident by fund flows and other excess such as a large spike in margin debt will be evident. 
3. There will be a popular view that recessions may be a thing of the past and therefore the bull market can continue indefinitely.
4. Stock market bears will be chastised and ridiculed.

We are clearly not at this point yet.