Bullish pundits have been saying for weeks that this rally can continue until everyone is bullish.
Check.
In my last post I explained that bull markets are measured from the bottom whereas bear markets are measured from the top. Therefore it's very easy to be in a new "bull market" while languishing far below the all time high. As is the case now. That said, all bull markets must start from a bear market low so the lack of a new high does not itself consign this bull market to implode. For that confirmation we turn to other indicators.
Among the indicators is CNN's proprietary "greed/fear" index. This indicator is particularly useful because it combines seven separate technical indicators into one composite index, making comparison between time periods easy: Momentum (1), Breadth (2), Positioning (1), Volatility (1), Equity premium (1), Credit spreads (1).
As of this writing this index is at 78, deep in the "Extreme Greed" territory. The highest level since February of this year. Recall, February is when banks left this rally and when the mega cap "AI" melt-up began. Note the divergence from the average stock since February:
Here we see AAII (retail) net bullish is at the highest level since the Nasdaq's all time high. Which serves as a very good confirmation for my NDX wave count. Exactly what one would expect to see at a wave '2' high. For those who are not familiar with Elliott Wave Theory, it merely posits that investor emotions are manifested in the market through repeating "fractals" or patterns. Is it perfect? Of course not. However this chart is about as clear as it gets, both in time and price and now sentiment.
As another indication of extreme complacency, we see that the VIX has now round-tripped back to the pre-pandemic level, as of this week:
Bullish pundits are now claiming that the recent weak breadth is a plus for this market because it means that the rest of the market is going to "catch up" to Tech. They arrived at this new consensus because this week, the Russell 2000 small cap index outperformed all of the other indices. It's important to note that they fell for the exact same b.s. at the all time high.
This was a lame rally by any standard, especially given the amount of call option firepower:
Which brings us to the FOMC meeting next week. Back at the October lows no one would have predicted continued Fed hawkishness this far into 2023. Just as no pundits predicted extreme Fed hawkishness throughout 2022. Fed Funds futures have fallen back to a 70% probability of a pause next week. However, the Bank of Canada surprised markets this week with an unexpected rate hike. So, it could happen.
In summary, this pattern of investors becoming bearish at capitulation bottoms and bullish at rally tops is something we will see over and over again during the coming years. Each time, pundits will make up new and less credible reasons for why this is going to be "the" big move. Each time, they will only succeed in herding investors into another dead-end Ponzi rally, at which point more investors will explode. Over time, bullish pundits will lose all credibility and they will be called "perma bulls". A derisive term indicating someone who is always wrong. Starting 18 months ago.
