S&P 500: Too Many Bulls Crowding the Market? Signs Suggest Pullback Could Be Near
2024.12.16 09:53
Look up in the sky. It’s a bird. It’s a plane. It’s Superman! Nope, it’s lots of drones flying over New Jersey, New York, and Maryland typically between 6 p.m. and 11 p.m. They are reportedly the size of an SUV, so they aren’t likely to be owned by hobbyists.
Some folks are getting panicky about all these mysterious drones. On October 30, 1938, Orson Welles read a radio adaptation of H.G. Wells’ “The War of the Worlds.” It caused a panic when listeners, who had missed the introduction, heard bulletins about a Martian invasion that started in New Jersey.
Is it time to panic in the stock market? It’s always best to panic before the crowd does. The issue isn’t too many mysterious drones, but rather too many charging bulls. Consider the following:
(1) Bull/Bear Ratio
As we noted last week, sentiment is very bullish, which is a sell signal from a contrarian’s perspective. Investors Intelligence Bull/Bear Ratio remained elevated at 3.8o last week (chart). There were lots of bulls (62.3%), a few in the correction camp (21.3%), and fewer bears (16.4%).
(2) Breadth
Another sign of possible trouble ahead is that sentiment is bullish at the same time that the breadth of the stock market rally has been falling (chart). Only 30.9% of the companies are beating the index on a y/y basis.
(3) 200-day moving average
Moreover, the S&P 500 is 10% above its 200-day moving average (chart). The Magnificent-7 ETF price is 21% above its 200-dma. Financials are also looking overbought on this basis.
(4) Cover story
The cover story in the current issue of Barron’s is titled, “Why the Stock Market Could Gain Another 20% in 2025.” The subtitle is: “Wall Street’s market forecasts are too tepid. The S&P 500 could rally next year on a combination of
AI growth and deregulation. But investors should prepare for a wilder ride.” We agree with our good friend Ben Levisohn, who wrote the story, though we are currently projecting 15% next year. Nevertheless, bullish cover stories like this one can be contrarian at least on a short-term basis.
(5) Insiders
We asked our friend Michael Brush for an update on insider activity: “The insider sell/buy ratio is about as high as it has ever been in the past decade. This does not bode well for market gains. The good news is that a lot of the selling is by insiders getting rid of stock into very strong price gains.
So, it is not clear if they think something bad is going to happen in the economy, or if they are being opportunistic and taking advantage of higher stock prices. The heaviest selling is in technology, consumer discretionary, and bank stocks. Sectors that look the best are pharma, biotech, and medical equipment. The bottom line: The stock market can have a hard time moving higher when insiders are so cautious. Their concern may set the market up for a pullback.” Thanks, Michael.
(6) Our bottom line is in sync with Michael’s
From a fundamental perspective, we see two possible triggers for a correction ahead. On December 18, the is widely expected to cut the federal funds by 25bps. But it is likely to be a “hawkish cut.” We wouldn’t rule out no cut on Wednesday. That could take the steam out of the rally, especially early next year if stock investors with large capital gains decide to rebalance their portfolios.
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