From the desk of Willie Delwiche.
Key Takeaway: Permabulls will almost always complain about rallies being unloved, just as permabears never leave their refrain that downside risks are under appreciated. That is the prism through which they view the world. In the current situation, complacency is rising and optimism is building, both from low levels. After the buying panic seen in the NAAIM data in July, we saw something similar in this week’s data from Consensus Inc (the largest one-week increase in optimism in over a decade). Even though bears still outnumber bulls on the AAII survey, equity ETF inflows are heating up. The shift from excessive pessimism to increased optimism is the most bullish part of the sentiment curve and that is where we find ourselves. Breadth thrusts and surging momentum are cherries on the top.
Sentiment Report Chart of the Week: Strong Momentum Doesn’t Usually Just Evaporate
This study looks at instances of 40-day momentum surging from below zero to above 15%. There are exceptions to every rule, and the signals here are no different. 1987 was a mixed bag of strength and weakness, and the bursting of the Tech Bubble coupled with the 9/11 terrorist attacks and ensuing recession prevented the market from building on the momentum surges in 2001. But overall when we have seen momentum spike higher in the past it doesn’t usually evaporate overnight. Rallies have tended to persist as strength begets strength. That is a message investors seem to be hearing right now.
