Sentiment Levels May Pose Headwind for Markets

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Markets are up over 8% since the October lows and as the market has vaulted higher so too have investor sentiment levels, which will have to be worked off at some point. As seen below, institutional active managers are the most bullish they have been since early 2013 (middle panel below) with retail investors the most bullish they have been since early 2012 (bottom panel).

Source: Bloomberg

Other indicators are also showing excess bullishness/complacency with current levels often associated with short-term market tops. As seen below, the put/call ratio rests near the lows seen over the last two years (middle panel) and the recent decline in the VIX is also at the extreme levels seen over the last two years (bottom panel), both of which suggest the markets need to let some of the bullish air out of the bag.

Source: Bloomberg

Even if a pullback occurs the market backdrop remains healthy and robust with no signs of a major impending top on the horizon. For example, new highs on the S&P 1500 Index (all market caps combined) shows new highs continue to hit in the 20-30% range on rallies while declines don’t even see new 52-week lows hitting the 5%+ mark. This indicates that the strength of the bulls (buyers) outweighs the strength of the bears (sellers), and economics 101 teaches us that when there are more buyers than sellers prices rise, and that is what we have with a rising stock market.

Source: Bloomberg

Not only is the stock market incredibly healthy but so too are general financial conditions. Both the Bloomberg US and European Financial Conditions Index rests near the highs and are confirming the markets recent move higher.

Source: Bloomberg

Until we begin to see market breadth deteriorate and financial conditions erode, any pullback in the market is likely a healthy event to remove an overly bullish and overbought market, rather than the precursor to a bear market.

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About Chris Puplava