Weekly Market Outlook

The S&P 500 hit a new all time high on Friday. This completes all 3 major US indices hitting new all time highs in the last few weeks as forecast back in October predicted.

But what should we expect from here? If you just have a look around and talk to the average market participant, at the moment it seems like the consensus is that stocks are overpriced and the macro outlook remains bad. Surprisingly, what I’m saying is that most people are still in disbelief of the stock market rally and are of the opinion that the market will pull back soon.

Just take a look at the data. People were actually more bullish a few weeks ago than they are at new highs. If we look at the American Association of Individual Investor sentiment from last week we can see that bullish investors dropped 8% while bearish predictions rose 2%. At the same time bullish sentiment is no where near extremes which usually come in the mid 50% range.

If we look at our fear and greed index we see the same data. The overall index is not even in the Extreme Greed phase yet. Usually when put/call ratio gets to extremes thats a good warning but right now we are right in the middle. The market sentiment right now is actually more neutral rather than bullish or bearish. People seem to be playing it relatively safe here and holding onto cash with still record amounts of money piling up in money market funds.

Lastly, from a technical standpoint breakouts and new highs are usually one of the best indicators that the asset is going to go even higher. The below image shows the S&P 500 performance when it takes at least one year or more to make new highs. Our most recent period was over 500 days making it the 7th longest time since 1928. What happens in the next 1 month to 1 year is almost always more upside. The three month performance is especially bullish with the market higher on all years besides 2007.

Now, looking at the actual chart for the S&P on a weekly time frame it looks quite bullish bouncing right off our Gann line and continuing to break the highs. The one factor that could end this rally at least in the short term is time. I have this week marked as 45 weeks from the March low which is of course the midpoint of 90 weeks. The 25th is a date I am watching for but with the way people are positioned and the sentiment data above I would not expect a major correction yet.