Too many people are fighting this rally

Mid-week market update: Until yesterday’s market melt-up, it seemed that individual investors were fighting the rally, which is a contrarian bullish sign. I noticed it on the weekend when the level of engagement on my bearish tweets were an order of magnitude higher than my bullish ones. In addition, the New York Fed’s recent consumer expectations survey was having trouble finding equity bulls.
 

 

Also take a look at the equity put/call ratio (CPCE), which is more indicative of retail investor sentiment as their trading tends to be more focused on individual stocks. The 10 dma of CPCE is consistent with levels seen during the spike late last year and higher than it was at the height of the COVID Crash.
 

 

By contrast, the latest BoA Global Fund Manager Survey of global institutions showed a growing willingness to take risk. The most notable change in sentiment was the stampede into the bond market.
 

 

This risk-on attitude has dragged equity sentiment with it, as respondents have shifted from underweight to a minor overweight position in equities, but levels aren’t extreme.
 

 

For a non-contrarian viewpoint, I also found it constructive that insiders had been buying this rally, though insider purchases (blue line) have been lower than insider sales (red line), which would be a buy signal.
 

 

The combination of skeptical high turnover retail sentiment, slowly
improving institutional sentiment, and constructive insider activity  is intermediate term bullish and supportive of a year-end rally and probably beyond.
 

 

Breadth is improving

Remember the concerns about poor breadth? Yesterday’s rally saw a stampede into small cap stocks. Both the equal-weighted S&P 500 and the small cap Russell 2000 have begun to outperform the S&P 500. This is a chart investors need to keep an eye on to see if the rally broadens out.
 

 

Yesterday’s rally was a short-covering rally. Bespoke reported that the most shorted decile of stocks within the S&P 500 gained 5.0% while the least shorted gained only 1.4%.
 

 

 

Short-term extended

Tactically, the stock market looks extended in the short-term. The 14-hour RSI reached an extreme overbought condition of 80. Similar conditions this year has seen the S&P 500 form a trading top and pull back until RSI falls to a minimum level of 50. A logical support zone would be the recent gap at 4425-4450.
 

 

Subscribers received an email alert yesterday hat my inner trader had taken profits in his long S&P 500 position, which he entered on October 27 and represents a close-to-close gain of 9.2%. He expects to re-enter on the long side once the market cools off in the coming days. Stay tuned.
 

1 thought on “Too many people are fighting this rally

  1. So many different thrust indicators say there is 100% probability that markets will be up in one year. That fits with my thesis of the DEMs presidential election strategy. Also and even more importantly the interest and inflation rates are projected to fall into election day too. History says an incumbent with a higher stock market at election time will win every time.

    Great for stocks but as this DEM winning outcome becomes evident the bond market will fear large deficits and a likely give up on the inflation front.

    But this is longer term stuff. Now I’m in and loving this year end powerful rally.

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