Sentiment Speaks: A New Bull Market Has Begun

In October, I was calling for a major low, and a rally to the 4300+ region. At the time, most of the market was expecting much lower, mostly based upon the worse-than-expected CPI report published that month. Yet, that news actually ignited the 20% rally off the low and caught most market participants by surprise.

If you did not learn your lesson about the economic data's effect upon the market from this instance, then it likely means you will never learn your lesson. And, those that did not learn the lesson of October 2022 taught me to be crazy at the time when I was looking for a rally to 4300 from 3500SPX, even before we bottomed.

Today, we seem to be in the exact opposite environment. While many of the former bears are now turning bullish (other than the usual perma-bears we all know), it seems the market has decidedly turned quite bullish. As you can see from the headlines we are seeing across the market, many are now embracing the "new bull market."

CNN: "It's official. We're in a bull market"

WSJ: "S&P 500 Starts a New Bull Market as Big Tech Lifts Stocks"

Yet, most have fought this rally tooth and nail, trying to glean market direction based upon such things as valuations, inflation, the Fed, banking issues, and many other places which have led them astray. As one commenter noted regarding the general views of the market:

"The logic is impeccable, but yet the market keeps rising and rising and rising...."

And, I am not even going to start on those that ridiculously claim that the "market is wrong."

Valuations based upon earnings seem to be one of the biggest factors making people disbelieve the recent rally and view that the market is getting this wrong. It's not the market that is getting it wrong... it is you. I propose that anyone that is basing their investment thesis on valuations is looking in the wrong place. I strongly urge you to review the historical empirical evidence. I have written about this in detail in a past article if you want to understand my perspective in a bit more depth:

Sentiment Speaks: How To Use Earnings To Dramatically Increase Your Stock Market Returns

And, last week, I tried to explain that the common view that we have moved into a bull market simply because we have rallied 20% off the October low is a superficial and arbitrary perspective which has no basis in history or fact:

Sentiment Speaks: '4300SPX Is Not Gonna Happen'

However, the titles of the articles we have all seen this past week are hyping this "new bull market" concept. In fact, the cover of Barron's this past week displays what seems to be the new common view of the market:

Yet, for those that have a sense of market sentiment and market history, you would know that when Barron's comes out with such a bullish cover, it often marks a topping in the market, as it displays the general bullish sentiment of the general market.

As I have tried to convey through the years, understanding market sentiment as an indicator of market direction is more valuable than all the other factors that many focus upon. The general factors that most have focused upon over the last 9 months have had them looking in the wrong direction. And, I have tried to explain it in as simple terms as possible.

You see, when the market reaches a bearish extreme, there is no one else left to sell as sellers become exhausted, and that is when the market turns in the other direction. The same happens when we reach bullish extremes. It is really that simple. The difficult part of the equation is understanding when the market reaches those extremes. So, a number of years ago, I penned this 6-part series of articles explaining our methodology as to how we make that determination.

With all this being said, I want to issue a strong warning to all those that are starting to think that the banking issues have been abated. That is the furthest thing from the truth in my opinion, as I think we have only struck the tip of the iceberg with the recent issues. This issue will be rearing its ugly head over the coming years and has the potential to be even worse than what we experienced in 2007-2009. Therefore, I strongly suggest you read our public work on this matter in order to protect yourself now before the real tsunami hits. In other words, Noah, it's time to build your ark while you still have the opportunity:

Safer Banking Research Articles

In the meantime, whereas most were thinking I was crazy about my expectation for the market to rally to 4300+, we are now getting there. And, as the market seems to be turning quite bullish, I am starting to turn quite cautious.

The market still has more room for the upside, but I think it is time for everyone to be tightening their risk management. Once this rally completes, I am expecting a sizable drop in the market. And, as I have outlined many times before, the nature of that drop will tell me if we will continue higher to 4500/4600SPX next, or if the market is starting a drop to 2700/2900SPX.

Yes, I know those are majorly different outcomes, but the market has the potential for either resolution based upon the nature and structure of the rally off the October low. So, until I see how the market drops in the coming months, I intend to tighten up my risk management, so I am not caught holding the bag in the event this rally presents us with the high we see in the market for the next two to three years.

Support is currently in the 4205-4245SPX region. And, should we see a sustained break of that support, that is the initial signal that the market has begun what could be a sizeable drop. We will have to analyze the nature of that drop in order to determine the next multi-hundred-point move in the market over the coming year. Should we continue higher over the coming two weeks, I will raise that support level.

So, the main point I am trying to make this week is that when many were uber-bearish, I was expecting the market to rally to 4300+. Yet, now that many have begun to turn bullish, I am now turning quite cautious, especially since we have now arrived at our expectation for 4300+ that we set many months ago.