Sentiment Flip

In light of new highs and significant volatility the last couple of weeks, we wanted to take a look ahead at a couple potential scenarios for the market. Below is what we have been chewing over, ordered by what we feel is more probable.

  1. Choppy consolidation and grind higher. At the beginning of the year we saw a minor V-shaped correction go on to challenge all-time highs in a similar fashion to where we are now. The result was sustained chop and a consolidating market grinding higher as it used up overhead supply before lurching higher.
  2. Breakaway-style gap. News from the BOJ was gasoline. There’s always potential for the match to strike and speculation to run really wild. Uninterrupted upside is a bit less likely given how far we traveled in the shadow of the extreme V-shaped recovery. Also, the back and fill price action has partially eliminated this scenario. However, the spirit of the pattern is still possible.
  3. Bull trap aka a big fake out.  It’s a shame for the market to expend all that energy for nothing. Fooling most of the people most of the time… sure. Then turning around and bitch slapping the rest? Well, that seems a bit extreme, no?

Option 1 seems the most probable given the trend and option 3 likely has the biggest payout should it play out (higher risk).

If we’re in another grind higher, there might not be as much resistance as there was back in the first quarter. Why? First, the swings are bigger now and it’s reasonable to assume the moves will be proportional. Second, the longer the bull market lasts, the more performance hungry money managers respond to the predator-chase instinct of new highs.

Thought we can’t shake:

The “tax break” via reduced energy prices could finally be the tipping point for long-suffering consumer sentiment. The consistently low readings in Consumer Sentiment relative to the S&P 500 making all-time highs has been one of the things that kept us bullish, or at least not bearish, for so long. If we get a reading in the high 90s or over 100, it signals the general public’s attitude about the economy flipped from being cautious to feeling very comfortable. Perversely, this is the first key signal for the termination of the bull market (or at least this phase of the bull).

For more info on consumer sentiment, check out Fundamental Top-Down Macro for the Brain Damaged.

It hasn’t been easy out there. Here’s a quote from one of the best:

“There is no training — classroom or otherwise — that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market. There’s typically no logic to it; irrationality reigns supreme, and no class can teach what to do during that brief, volatile reign. The only way to learn how to trade during that last, exquisite third of a move is to do it, or, more precisely, live it.”

– Paul Tudor Jones



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