As we enter the last couple months of 2014, the markets are once again at/near all-time highs:
- The Nasdaq, which last hit 5K in 2000 before a dramatic decline, is now just 8% away from hitting that level.
- The Russell 2K, which was left for dead and blamed for leading the markets lower, is only 3.5% away from an all-time high. As recently as September, the Russell was falling precipitously – it was clearly the one to sell – but the recent expansion in breadth has given new life to the small caps.
- The SPX 500 is now up about 9.5% YTD, and after a nasty 6.5% drop in early October, it miraculously finished higher by 2.3%
November ushers in positive, seasonal market pattern trends. The period from November to April is historically the strongest of the year; it contains many extended holidays and heavier money flows. The current earnings season has been a mixed bag, but generally speaking, growth is running ahead of expectations. That may all soon change as big energy names release their reports, which are expected to be disappointing. However, numerous sectors, such as retail, technology, consumer and durables, have been strong.
Turning our attention to indicators, volatility has made a sharp retreat from the multi-year high levels it was hitting just a couple of weeks ago. Sentiment reached some rarely-seen extremes as selling intensified on news of Ebola and other crises. In fact, sentiment made the market look like death warmed over.
But with the rubber band stretched WAY back, once it snapped, the indices were off and running. We have never seen a 200 handle move in the SPX 500 in just 13 trading days, but it happened! We bought some SPY 190 calls with Oct 31 expire on Oct 17 for about 1.67 and were content selling them a couple days later for near double. Sadly, we were not in the play on expiration – those calls closed north of 11!
So, where do we go from here?
Well, as you might expect, sentiment has shifted sharply in the bullish direction, so much so that I expect the market to pull back some. But with the table set for a move higher, I don’t expect that move down will last too long or go too deep – the indicators have all moved into the bullish camp.
The put/call ratios are racing lower, the VIX is still trending lower and has not made a definitive turn yet, sentiment polls are not wildly bullish, and money flows are strong. A higher high and a higher low on the daily chart tomorrow is a bullish tell: Higher prices could be on the way.
The chart below indicates the rally is long in the tooth but is not exhausted. That said, we would be cautious buying too much here until a pullback to the 1970-1980 area (circled on the chart).