Stocks staged a nice little rally on Friday and while volume was lower than the session before it did not matter to the SP-500, NYSE, Nasdaq, or Nasdaq 100 as all of those indexes hit new all-time highs this week. The only concern behind yesterday’s rally, besides the lower volume, was the fact that we finished on a sour note with the indexes selling off into the close. Considering how extended–but not overbought on my RSI-14 and MACD indicators–we are price-wise from the 200 day moving averages still on every index and the bullish sentiment overall, I am definitely not surprised we could not finish out on the highs.
Looking at that bullish sentiment, it’s getting pretty frothy. While this does not mean the end of the uptrend is here it definitely means that anyone that is uber-bullish here needs to check themselves before they wreck themselves. The AAII bulls are almost back up to 50%, the II bulls have hit a historical hard-to-reach watermark of 60%, the NAIIM exposure index is at 99% long, and the CNN Money Fear&Greed index while not at an extreme level is still at a bullish 70. And while the IBD put/call ratio shows .89 on their website, the CBOE website shows the equity put/call ratio at .68. Ladies and gentlemen, that is complacency.
Now lets layer on another fun event. Earnings season. We are walking straight ahead into earnings season and if you do a quick look-back over the past three years during every quarter of earnings season and you can see we get quite volatile. Extended indexes, bullish sentiment across the board, and an upcoming earnings season should trigger all the caution flags you can think of in your mind. If it doesn’t, you have a bullish bias and I suggest shaking it off here on the short-term. Now, this doesn’t mean the market has to sell off or even if it does sell off that we will not hit new highs within the next few months. What it does mean is that contingency plans need to be made in case a sell off starts.
I still have a few hedge positions on but quite few have had their final sell stops hit with the market hitting new highs so now my portfolios are more long biased than they were heading into the week. If the market continues higher this will be great news for my long positions. If the market reverses lower, my stops will come into play and I am 100% sure I will receive a new round of hedging signals and who knows maybe a short signal here and there. They have been few and far between post-election. So know matter what happens here, I have a game plan and will implement it according to how the market decides to handle its new highs here.
Great luck during the upcoming trading week. Trade intelligent. Aloha.
