So, I left off by saying wake me up when September ends...well I'm awake now! I was ST cautious, LT bullish when I last posted. My ST caution call did not pan out, but hear me out. First of all, when it comes to the ST, conditions can change very quickly which they did and I'm not necessarily going to make a post when that happens as I typically don't post very often. Also, making ST calls is often a crap shoot anyways as randomness plays a big factor. I've always stated that and I've always said to place your focus on longer term conditions. Not making excuses, just tell it as it is. When the market had just the slightest of dips in mid August, many of the ST indicators got reset as folks ran for cover which placed the market back into a favorable ST condition. For instance AAII sentiment showed more bears than bulls in early August and it stayed that way until mid Sept even as the market rallied. Such stubborn negative sentiment almost always means any dips will be shallow or non-existent. In the last 3 weeks the bull/bear ratio has risen to 1:1 which is only a grudged shift in bullishness. It's highly unlikely the market will be close to a major top until you see a custer of readings where bulls outnumber bears by at least 1.5:1. Another group of folks that continue to be reluctant to embrace the market continues to be hedge funds. The 2 hedge fund positioning components of the BofA bull bear indicator continue to show we are nowhere close to seeing exuberance. Benign readings like this simply don't happen near major tops.
Yes, of course corrections can still happen when sentiment is not in an "all in" bullish condition but more often than not, it doesn't pay to get paralyzed by the ST and not make a move on a long trade you are considering assuming you have a longer term horizon (at least 1 year) and won't shit the bed if you do get caught in a correction. But you do you.
I see a lot of angst on fintwit about high valuations. Yup, they are high but that's not necessarily actionable. Why are valuations high and can it be sustained is what you should be asking. High valuations in the market are attributed to the MAG 7. With the exception of Tesla these are monopolistic-like type companies that have been able to sustain high margins and significant free cashflow and now with a benign interest rate environment, it further underpins the valuation of these cashflows. Yes, the fundamentals of these companies can change but until they do the "high valuation" argument will not hold water until there is an almost universal embracing of these companies which would then make them vulnerable to just the slightest of missteps or some negative macro issue. Of course you will find plenty of people bullish and long the Mag 7. but is there room for even more bullishness? I believe so yes. Again, just look at hedge fund positioning.
I want to take a step back for a moment. We've been in a secular bull market since 2009. Since then we've had 5 major corrections/mini-bear markets of 20%+. Just prior to all of these corrections you had complacent conditions (except for perhaps the 2011 decline) from multiple sentiment indicators and anecdotally via the popular narrative at the time. The corrections that ensued ended up resetting sentiment back to skepticism/pessimism which has been the default condition since the GFC. This resetting of sentiment allowed the secular bull market to resume. It didn't matter what the cause of the correction was or what the fundamentals or politics were...so long as we got the sentiment reset, the bull market was able to resume and hit new heights until we got to the condition again where sentiment became complacent/chronically bullish. Coming into the year I was bearish because of the complacent sentiment condition of the market which was underpinned by the election of Trump. Ironically, it was because of Trump that we ended up getting a 20% decline instead, because of "Liberation Day". This resulted in the opposite condition where sentiment became quite negative because of Trump. Could it have gotten even more negative with the market tanking even more than 20% if certain things had happened? Of course, but once you get this type of negative sentiment condition, it becomes a question of when, not if, the market will hit bottom and the bull market will resume. This has been how things have played out since 2009. If you just simply ignored whatever the "fundamentals" are put all your faith in monitoring what other people are doing/feeling and went against them at the extremes you would do quite well. Of course, it's difficult to do this as emotions can get in the way and there's an art to doing this for there is no way to know for sure just how extreme an extreme can get!
Even when we hit those major tops which led to a 20%+ declines, we never got to the point where there was widespread optimism from not just investors but folks in general. I'm talking about the late 90's type optimism. I'm thinking that at the ultimate, secular bull market top, we will see this type of optimism....seems like that's impossible to ever happen given all the angst and division that is out there.
