“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.” – John Templeton
Alan Greenspan put it another way, in a speech given at the American Enterprise Institute, extolling the apparent “Irrational Exuberance” in the markets. The phrase was interpreted as a warning that the market might be somewhat overvalued. The problem is, the speech was given on December 9, 1996 and the markets roared higher for another four years.
So, are we experiencing fear, skepticism, optimism or euphoria?
With futures lower this morning, it certainly feels like every dip produces temporary fear, be it on Federal Reserve news or some other catalyst. Remember the fear in the market, prior to the election results? Brexit? Still, the market keeps trudging higher. It also feels like a mix of optimism, as we consider recent earnings data.
Earnings for the first quarter are in the books and by all measures are the best reported seen since first quarter 2011. Investor Business Daily IBD50 Listed companies are also reporting stellar numbers.
Bullish percent is in the mid range as well, neither exceptionally bearish at higher level of exceptionally bullish at depressed levels. Note as the bullish percent line trends lower the market has been trending higher. The last extreme reading was in February. Weeks later the markets started to pullback. We are not there yet.
The Wall of Worry
Financial markets have a tendency to surmount most negative factors. The term, “wall of worry” is generally used in connection with the stock markets, referring to the markets ability to surmount temporary stumbling blocks and impediments, rather than halt the market advance.
With earnings not in question, the FED has signaled it is more concerned about debt.
The FED has been saying it wants to shrink the balance sheet. And, with over $4.5 trillion in Treasurys on the books, Yellen and team have their work cut out for them. Thhink of it this way; if the FED reduces the stimulus that got us to such lofty levels, will removing it produce a top in equity markets?
The basic idea will be that the Fed will stop reinvesting the principal of securities when they mature. Then, when a 10-year Treasury on the Fed’s books comes due, the money it receives will not be used to go out and buy another Treasury. Food for thought.
SPY is trading sideways on this 60 minute chart. Volume by price and institutions are positioning along these levels at 243.57 (13.5 million in blocks). A loss of this level would be short term bearish. That said, TICK cumulative is moving higher on this time frame and on the daily, so until institutions stop buying, we are in “wait and see” mode.
Meanwhile, gold futures are selling off, currently trading (-20.00) at 1255.00. S&P500 futures are off 15 handles more of less. Up down volume will more than likely tell the picture this morning, so keep an eye on volume for direction.
The take away this morning is this. If we are topping, it will likely be on euphoria, not fear.
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