Same Ol’ Situation

The Mötley Crüe song title comes to mind: Same Ol' Situation. 

It's always the same questions. Every bull market.

How much higher can stocks possibly go? Was that last high the top? Why is the economy not as strong as the stock market? 

That's the thing. We want to pay attention to what's happening around us. Because we've seen it before and we'll see it again. It's just humans being humans. 

I like to turn to the data and weigh the evidence so we can try to make the most informed decisions possible.

The way I see it, this has been a bull market for quite some time, well into year 3 now. Whenever a lagging sector has been most vulnerable to break down from a major top, the opposite has happened.

The money has come in and bought them up. We just saw that in Consumer Discretionary in the back half of last year. And Industrials before that. And Technology and others before that entering 2023.

When you've needed them to come and buy them, they have. And that's why the new lows lists are non-existent, because it's consistently the closest ones to making new lows that get bought up and rotated into. 

I see Consumer Discretionary outperforming Staples. I see High Beta continuing to act well vs Low Volatility. And Credit Spreads are as tight as they've been this entire bull market. 

Even sentiment is surprisingly bearish, given how well stocks have done the last 2 years. 

This week we saw the largest inflows into money market funds since April of 2020. That was exactly the beginning of the greatest 52-week period in stock market history. 

Maybe this time isn't exactly like that. But it is interesting to see the flows into cash, just as sentiment data falls out of bed.

It's what they're saying AND what they're doing that is historically the opposite of  what works in bull markets. And to be clear, this is how irrational humans behave consistently during bull markets. It's one of the primary drivers. 

Here are the key levels I think are important in the S&P500:

My whole thing has been that if breadth keeps improving, we did see new cycle high in the new highs lists in Q4, and the indexes themselves are above former resistance, than we want to be spending most of our time looking for stocks to buy.

It's been that simple. And that mentality has been very rewarding this bull market.

Here's a potential bearish momentum divergence on the weekly timeframe that certainly has our attention. 

These are the types of patterns you'll typically see near important peaks, where a series of higher highs in price is diverging with momentum readings showing lower highs.

If the S&P500 is going to break, I think you'll likely see it in the Nasdaq first, because it's much more vulnerable:

Or even the Dow Jones Industrial Average, in a similar setup as the Nasdaq.

If these indexes lose these levels, I would expect an expansion in the new lows list, and the first actual crack in markets.

This one has a 15% short interest and 7 days total to cover, if every single short seller bought back their positions at the average daily volume. 

That's high.

We like that.

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