Sentiment Speaks: As Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market

For those who have followed my stock market analysis through the years, you would likely remember that, many years ago, I set a minimum long-term target for the SPX at 5350, with potential to rally as high as 6000SPX. In fact, many of you may also remember my expectation for a 30% correction, which I was publishing in late 2019 and early 2020, well before anyone even heard the word Covid.

In fact, I even publicly suggested a short trade on EEM (because it had the best low risk, high probability set up of the index charts I was tracking at the time) back in February of 2020. And, then as the SPX dropped down to our long-term target in the 2200SPX region, I outlined my expectation for the market to bottom and begin a rally taking us north of 4000SPX.

Now, consider that we were in the midst of the Covid crisis, with the highest death rates being reported as we were approaching 2200SPX, along with economic shutdowns being seen across the country, and even the world, and record unemployment being reported. So, when I was proclaiming a bottom approaching at 2200SPX, along with my expectation for a rally to 4000+, this comment was representative of most of the ones I was seeing at the time:

"Coming from someone who still thinks the bull market of January is alive enough to carry us to 4,000, that's highly unmeaningful... Here is the 2200 exactly that you said the S&P would bottom at before taking the trip back up to 4,000... What do you want to bet the ECONOMY is going to pull it down a lot further and that 4,000 is a lot further away than your charts ever said... THIS bull market did not ever come close to taking us to 4,000, and it is not taking us anywhere ever again because it is DEAD. OFFICIALLY and in EVERY way. Every index is DEEPLY into a bear market now. The bull is dead, and so it can NEVER take us to 4000. What you predicted can NEVER come true now... my own resolution is that this market has a lot further to fall because it is now following the economy, which it long divorced itself from; whereas Avi doesn't believe the economy ever means anything to stocks and has told me so several times last year... So, you have that common sense view, or you can believe Avi's chart magic will get you through all of that and is right about a big bounce off of 2200 all the way back up to 4,000."

We all know what has happened since. And, in truth, we have made many such seemingly crazy market calls throughout our 13 years of publishing stock market analysis. The last major low we called was at the 3500SPX region when most everyone else was looking for much lower due to the worse than expected CPI report which came out on the day we bottomed. In fact, the day before we bottomed, I wrote the following to my subscribers:

"Thus far, the market has made several attempts at hitting the blue box support region on the 60-minute SPX chart. And, each time, divergences continue to grow. And, if you look at the 5-minute SPX chart, there is still opportunity to actually strike that support below as long as we remain below the smaller degree resistance noted. . . But, I think we will likely be much higher than where we stand today as we look out towards the end of October, or even into early November, depending on how long it takes the market to bottom out, and how fast the rally I expect takes hold."

In fact, before the market opened on that Thursday morning (after CPI was announced), and as it was hovering near the final low, I sent out an alert to our members at 8:56AM, noting my expectations for a major bottom being struck and noting that "[t]his should now be the selling climax that completes the downside structure." The market bottomed within half hour of my alert and rallied 6% off that low on that day alone. This began the current rally which has carried us north of 5000SPX.

I explained at the time that the rally I was expecting should take us from the 3500SPX region to at least the 4300-4450SPX region, and depending upon the nature of the rally, I was leaving the door open to take us to the 5000+ long-term targets I set many years ago.

What astute investors have learned through the years is that when most of the market is certain that one thing is going to happen, the exact opposite usually is more likely. I think these two quotes from the legendary Jessie Livermore say it best:

"The stock market is never obvious. It is designed to fool most of the people, most of the time."

"When everyone thinks alike, there isn't much thinking taking place."

You see, markets are rather simple when you break it down to its core driver. When people get too bearish and sentiment hits a negative extreme, then everyone who has wanted to sell has sold, and there is only one direction left for the market to take. The same applies when the market gets too bullish. And, that is basically what Mr. Livermore's second quote is saying. When everyone is thinking the same thing, it means that the market is likely approaching an extreme, which occurs right before a market turn.

At the end of the day, markets are driven by human nature, and many recent studies based upon market psychology are coming to the same conclusion. In a paper entitled "Large Financial Crashes," published in 1997 in Physica A., a publication of the European Physical Society, the authors, within their conclusions, present a nice summation for the overall herding phenomena within financial markets:

"Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an "emergent" behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness."

We saw it back in late 2019 and early 2020 as the market was topping at an extreme in bullish sentiment, we saw it at the bottom of the Covid Crash when the market was striking an extreme in bearish sentiment, we saw it again in October of 2022 when we called for the bottom at 3500SPX at another extreme in market sentiment, and I think we are now approaching another inflection point as we approach my long-term minimum target for the SPX in the 5350SPX region.

What is also quite interesting is that many of the long-term bears have been giving up on their bearish views. One of the most well recognized bears on Wall Street has been Mike Wilson from Morgan Stanley, who has been bearish since 2020, and maybe even longer. In fact, in February of this year, he was taken off the Morgan Stanley Global Investment Committee likely due to his bearish perspective during a raging bull run.

Yet, of late, he has backed off on his bearish views, and has even turned bullish for 2024 and 2025. So, when die-hard bears begin to turn somewhat bullish, one has to be on the lookout for a potential market top, as it likely means the overly bullish pervasive sentiment has even affected them.

Now, I know that many are still viewing the market as having much higher to rally for various fundamental reasons. And, they could be right. Yet, consider we hear these same fundamental reasoning at major market highs and lows, as people can always find reasons as to why the market will continue linearly within its current trend. As Ben Franklin once astutely noted:

"So convenient a thing it is to be a reasonable creature, since it enables one to find or to make a reason for everything one has a mind to do."

But, when I am seeing people claiming that stocks like NVDA can triple or even rally ten-fold from here, well, I think we are nearing a point where it's time to ring the bell as bullish sentiment is getting quite frothy. In fact, whereas I was very bullish on NVDA when we saw a 5-month consolidation earlier in 2023 in the 450 region and I outlined to my subscribers that I am getting very long in the stock, I am now seeing signs that we can be approaching a major top in that market bell-weather stock as well.

So, in the near term, I am seeing this past Friday's low as relatively important. Should we break down below that low, and develop a 5-wave structure off a high, then it is an initial signal that a major top may have indeed been struck. Clearly, I am quite cautious in the overall equity market and have reduced my holdings in equities, while increasing my holdings in treasuries of late. But, I will not be turning outright bearish until I get that 5-wave decline below this past Friday's low.