As I always say regarding the market, and my ability to make short-term prognostications, my crystal ball is in the shop for repairs. That being said, here are some bullish and bearish signs I’m seeing in the market.
Laying Out the Bull Case for the Stock Market
First, let’s start with the bullish side of the coin:
Bullish – As the old saying goes, the most bullish thing a market can do is make new highs. And with the S&P 500, Dow and Nasdaq all at highs, there isn’t much not to like.
Bullish - Option activity, for the most part, the last three weeks has been bullish, which means hedge funds and institutions are using options to get more bullish exposure than bearish. This is one of my favorite signals for a market’s strength.
Bullish – The old floor trader in me often keys off the action of the Financials (XLF) and the Semiconductors (SMH), and both of these critical sectors are at, or near, all-time highs.
Bullish – The Chicago Board of Options Exchange Volatility Index (VIX) has been trading in a range between 14.5-16.5 for the past several weeks, which, in my opinion, is the perfect level of fear. What I mean is, there isn’t extreme complacency (VIX at 12-14) and there isn’t real fear (VIX at 20 or above).
Now let’s move on to what “worries” me about the market:
The Bear Case
Bearish – Restaurant stocks like SG, CAVA, WING and many more look awful, which leads me to believe the consumer may be pulling back. And on that same theme of a weakening consumer, “Buy Now, Pay Later” stocks AFRM and UPST have been under pressure as well.
Bearish – The Barclays Euphoria Indicator is flashing potential over-exuberance, and previous such readings were seen during the dotcom bubble and the meme stock frenzy.
Bearish – Via Bank of America, Investor Sentiment has risen to a 7-month high, which can be interpreted to mean investors are too bullish on the market:
Bearish – Via CNBC, the “Buffett Indicator” for stock valuation passed 200%, beyond the level he once said is “playing with fire.”
2 More Bits of Evidence in Favor of the Bullls
Now let’s get bullish again:
Bullish – Despite historical data that shows the end of September is a weak time of year (in all years since 1928, the last 10 days of September saw the worst average and median returns), the market was mostly flat during that time frame this year, and the month of September closed with a gain of 3.5% on the month.
Bullish – I think it’s fair to say we are in a full-on rotating bull market. What I mean is, while there are some worries day to day with one sector or another, the buyers just move into other sectors, which helps the indexes continue to rise. For example, AI stocks might be weak one day, and then money rotates into Financials. And then the next day, the Transports might come under pressure, but then traders buy Bio-tech. This is a rotating bull market.
Stepping back, at some point the bull market will end, of this, I am sure. But for now at least, my belief is that while the market may have some short-term pullbacks (which is normal), big picture, it’s possible that stocks are actually in the early innings of a multi-year bull market run.
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