With so much bullishness ingrained in the markets these days, it makes one wonder when the rally will end. Of course, we are not market timers -- an utterly difficult task to accomplish. Rather, we look for the clues that help us decide when and how to proceed. We try to determine when the market is safer to be long, or when it's time to step back, reassess and lighten our load.
But when sentiment is at an extreme as it is now, our instinct is to get in front of a turn, probe the data and make our exit before everyone else does; in other words, a contrarian stance. That makes sense, too, because when the boat is tilted too far to one side everyone tends to get thrown overboard. It's a classic case of too far, too fast.
So, we have a market that has been on fire for a few months now. Indeed, this recent run has seen nary a correction. Since early October the 20-day moving average on the daily chart has served as a forceful shield of support. Only once has the S&P 500 closed below there since a gap higher on Oct. 11, just about three months ago. That is impressive.
Back to sentiment. You'd be a fool not to believe the bulls are in control here. A 12% run higher from Oct. 11 has this market on a blistering, but unsustainable, pace.
When does the music stop? We don't know, but the clues will be there. Current breadth figures are outstanding, with new highs crushing new lows (see the chart below). Compare this period to late 2018 and you'll see what I mean.
The VIX has remained rather calm, too, with the fear index still showing high complacency. Simply put, markets can rise when the VIX is low, as it has been for many weeks, and that has frustrated just about everyone. But the signals tell us when to go, not why. For its part, the volatility index has not closed above 16 during the past three months. Money flows have been enormous into stocks while the put/call ratio, an option sentiment tool, reflects more call buying than anyone could imagine. No wonder we are at new highs.
Yet, so many market participants are frustrated or discouraged. The wall of worry is up high and may just drag the most bearish of investors into the fray. At that point, we might be headed for a turn down, but let's wait for the market signals first.