Here are the latest technical and sentiment indicators:
Technical Indicators (daily chart)
S&P 500 one-month trend = Bullish
S&P 500 is above its 50-day moving average = Bullish
MACD (S&P 500; 19,39,9) is above its zero line = Bullish
MACD (S&P 500; 19,39,9) is above its signal line = Bullish
S&P 500 support @ 2700
Sentiment Indicators (+RSI)
II survey: (Jan. 2): 61.9% Bulls; 15.2% Bears = Bearish
AAII survey: (Jan. 3): 59.8% Bulls; 15.6% Bears = Bearish
VIX: @ 9.22= Bearish
RSI: (S&P 500) @ 78.31 = Overbought
Comment: According to the sentiment indicators, we are in the euphoric stage of the bull market, and if history is any guide, it will eventually end in tears. In addition, the eye-popping indicators include the RSI, which is reaching extremely overbought levels (70 is overbought), and the AAII sentiment survey, the highest bullish number since 2010. Retail investors have been relatively neutral through 2017, and now they’re “all in,” which is a huge danger sign. Add in the extreme levels of margin and you have the makings of a severe correction.
And yet, it’s risky to bet against the euphoric stage of this bull market as it can trample over any shorts. Just like bitcoin taught us, extreme levels can get even more extreme. Nevertheless, be prepared to buy puts at the “right” time. If you’re too early, you will lose money (see the great movie, “The Big Short,” for a refresher course). I believe that 2018 is going to be a lot more challenging than 2017, so keep your pencils sharpened. If I’m right, volatility will not only increase, it will skyrocket this year.
If you’re long and feeling euphoric (as one reader wrote me), enjoy the party but stay close to the exit. It’s not wrong to reduce your long positions. If you’re skilled, you can ride the end of the bull market a bit longer. The euphoric stage is the most delicious and satisfying, and the most deceiving. It’s where every investor is a genius simply for being in the right place at the right time. Meanwhile, I can hear those police sirens coming closer while the party rages on into the night. Few believe the party will end this year (maybe next year, they always say).
Get out the popcorn, this is going to be a fascinating year.