Photographer: Ralph Orlowski / Bloomberg
Photographer: Ralph Orlowski / Bloomberg
The way is set for a volatile year-end in the US stock market as bullish and bearish signals both hit extreme levels in recent days.
Bulls are encouraged by the increasing breadth of the current rally. A gauge of momentum – the five-day moving average of new 52-week highs on the New York Stock Exchange versus lows – is just past its highest in 10 years. Bears point to measures of extremely positive sentiment – such as record call options volumes – to bolster their case for a pullback.
“There really is no way to perfectly reconcile the conflict between high optimistic sentiment and high momentum,” Jason Goepfert, founder of Sundial Capital Research Inc., wrote in a note to clients. “Buying breakouts with leveraged positions in these types of circumstances is very risky. Shorting is not much better, as these kinds of momentum conditions can last for weeks or months. “
The S&P 500 Index stopped a four-day losing streak like Congress on Tuesday towards a spending package that would stimulate the economy. The US benchmark is trading a fraction below its all-time high, up 65% from its March low.
According to Bank of America’s latest fund manager, investors have been most bullish on stocks and commodities since February 2011 survey. Still, a drop in cash exposure has triggered a sell signal for stocks, BofA strategists said.
“Objectively, the most likely scenario is limited, choppy at best, with a high probability of a minimal decline of 3% to 8% in the next 1 to 2 months,” Goepfert wrote. “That leaves both sides with a bad line-up.”