I always like to say that it takes "bulls to make a bull market". These are the kinds of market conditions that would best characterize the strong bull runs that started in 1995, 1998, 2003 and 2009. In each of these time periods, the sentiment indicators became bullish very quickly off the bottom and stayed that way for months on end. As we end this week, higher prices have brought out the bulls as expected, and for the second week in a row, the "dumb money" indicator shows too many bulls. Surprisingly, the "smart money" indicator is also bullish at this juncture. There are lots of bulls and it is reasonable to wonder the following: are we entering a period where bullish sentiment will remain strongly bullish while the markets continue to move higher?
It is my belief that the bulk of the market gains seen in this rally are behind us, and there are 3 reasons why I believe this.
Reason #1. In the 4 time periods noted above, the markets were coming out of periods of severe under performance. In 1995, the markets were coming out of a 36 month consolidation, and in 1998, 2003, and 2009 the markets were deeply oversold following crushing losses. At this juncture, the current rebound appears to be nothing more than a mild, if not tenacious, oversold bounce. Prices were not too oversold prior to the start of the rally 8 weeks ago, and last year's gains were certainly respectable.
Reason #2. About 80% of the time when the "dumb money" indicator shows too many bulls, the next best buying opportunity will occur when this indicator show too many bears. In other words, the "dumb money" indicator will need to cycle lower, which means we should be seeing lower prices or a better buying opportunity in the future.
Reason #3. The April, 2010 ("flash crash") and November, 2007 ("market crash") highs are within several percentage points on the S&P500 and Nasdaq Composite, respectively. It would seem these milestones should provide some degree of resistance particularly for a rally built on such a tenuous foundation (i.e., poor volume).
In summary, the market trend remains up. Sentiment is becoming increasingly bullish. It is my belief that the best gains are behind us, and overbought conditions are expected to mean revert.
Now for this week's charts.
The current bounce has followed the expected script.