Photographer: Ralph Orlowski / Bloomberg
Photographer: Ralph Orlowski / Bloomberg
The scenario is forecast for a volatile year-end in the U.S. stock market after both bullish and bearish signals reached extreme levels in recent days.
The oxen are cheering for the expansion that is being strengthened in the current rally. A margin of momentum – the five-day moving average of new 52-week highs on the New York Stock Exchange relative to the lows – is just below its ten-year high. Bears point to extremely positive sentiment measures, such as record call option volumes, to bolster their case for a setback.
“There really is no way to perfectly square the conflict that is happening right now between high optimistic sentiment and strong momentum,” Jason Goepfert, founder of Sundial Capital Research Inc., wrote in a note to clients. “Buying risks with leveraged positions in this type of environment is highly risky. The short circuit is not much better, as these driving conditions can continue for weeks or months.”
The S&P 500 index halted a four-day streak of losses on Tuesday, as did Congress he headed for a spending package that would boost the economy. The US benchmark is trading a fraction below the all-time high and has risen 65% from the March low.
Investors are the most bullish on stocks and commodities since February 2011, according to the latest fund manager at Bank of America poll. Still, a drop in cash exposure has sparked a sell signal, BofA strategists said.
“Objectively, the most likely scenario is limited, at the top chopped, with a high probability of a minimum setback of 3% to 8% over the next 1 to 2 months,” Goepfert wrote. “This leaves both parties with a poor configuration.”