This Market Is On Fire

The charts continue to roast the bears. It’s been an aggressive run; the bears are trying to hang on, but it seems they are getting knocked off every perch. The Nasdaq joined the party this week, with the $SPX and the Nasdaq both making higher highs (55 day highs) together. That change in price action supports my bias that this market is on fire and has higher to go. The Nasdaq still has the September high to take out.

Bear trying to hang on to some wood pillars

But the question on everybody’s mind is – will it last?

I think every bear on the street is talking about how the bears have receded and the bulls have taken over the podium. The optimism is at record highs. The difference between the bulls sentiment and the bears sentiment is at peak spreads right now. While I agree we can get to peak hype after a long extended bull market run, I do think the investing optimism around three very positive vaccine results are warranted. A whole new group of stocks are participating and we have broad participation across industries.

To me it feels almost like a post-war optimism. I have no idea how great it must have been when the 2nd world war was ending and almost everybody worldwide had the chance to get back together. Friends and family could come home, people could be together safely, and the world became optimistic on how things are going to work out.  The 2020 shutdowns and restrictions have dampened everyone’s free spirit. Could it be that the early relief promised by the multiple vaccines can release the pent up emotions of the world? And if so, could 2021 be one of the best years in recent history, relative to how rough 2020 was?

In 1945, as the allies started to advance positions on the mainland in Europe, the market started to rally in July. The US market continued to rally right through the signing ceremony (November) and continued all the way into the spring. The chart rallied from July through to January, pulled back and then rallied into March. You can bet the optimism spread between bulls and bears stayed extreme for a long time.

Because everything is bullish, it does not mean the end is near. The end the rally is near when 1/4 of the stocks start to fall away and we only have a few leaders left. This happens in surges. If we were currently in market topping surge, on the next rally fewer stocks would come back up after the rally. We just had one of the surges in September/October where the Nasdaq sold Apple off 20%. Three or four of the sectors had been left out of that rally. Energy and Financials were big under performers. That was before COVID vaccine results came back and if the vaccine results were relatively unsuccessful, that probably would have slowed down the outlook.

For me, I think the vaccine news from three of nine strategic approaches ended up being a game changer. If we had to live with masks for 3-4 years and continued to see loved ones perish alone in overcrowded hospitals, that would definitely have crushed a lot of the 2019 life patterns. Now that the world can go back to being optimistic, that is very positive. I would prefer to be invested when all the clues point upward. That is the backdrop. We can stay optimistic for months.

Below are a couple of charts that I like to use to help me with where we are so I don’t stay bullish too long or bearish too long. If this market is on fire, then the charts should confirm that through various indicators. We have a lot of methods to review bullish sentiment. If the readings are still strong, it’s not a reason to stop being bullish.

The top panel of the chart is the log chart of the $SPX.

The second panel is the Bullish Percent Index for the $SPX. This keeps track of the percentage of stocks on a buy signal. As long as the indicator is above the red lines, it is very bullish. Above one of the red lines is strong, but needs to be watched. If it goes below the red lines, that typically means the market is heading into or currently in a correction. Corrections of 5-10% show pullbacks to the 50% level. One of the things to like about the indicator is that when it keeps pushing above the top line, that shows that lots of stocks are on a buy signal. Since the COVID low, this has been thrusting to very high levels, suggesting lots of involvement in the bull market. Investors will rotate between sectors, and currently they are pushing towards the growth side of the sectors. Notice the weak markets typically can’t get up to these strong levels if we look back in 2003, 2008, 2015 and 2018. Throughout all of 2018, not many stocks were participating when the trade tariff dispute was underway. The big push down in 2018 was a response to the trade tariffs, and the market huddled in a few sectors to weather the storm. These high levels are the types of readings I want to see to support my claim that this market is on fire.

three part chart. S&P 500, Bullish percent (74%) and lower panel is stocks above the 200 day (91%)

The lower panel shows the percentage of stocks above the 200 day moving average. This chart is actually one of my favorites to visually demonstrate the strength of the bull market clearly. Notice how the bull markets of 2003, 2009, 2011, 2013 and 2020 all hit this level. Even in 2007, it reached up there, but the stock market never topped until 6 months after this high level.

Without a doubt, both indicators above are demonstrating the traits of a big bull market. I would suggest that unless we get a hiccup in the vaccines, the market is looking past the near-term slowdowns. These indicators confirm each other and add conviction that this market is on fire and is set to continue. What would usually happen as the market weakens is the lower panel would be  weakening (like late 2014, early 2015)as we struggle. The fact they are both very bullish, means optimism could stay with us like the 2013-2014 period for a long time.

My number one tool for market sentiment is my Schnell Strength Indicator. It keeps track of momentum. Currently on all time frames the market is very strong. This chart does a good job of helping us be bullish when the markets are strong, and get defensive when they weaken. Subscribers to the weekly market overview service at have this chart to help them every week. It continues to be bullish and as long as it stays above 75, we are in good shape.

This chart confirms the sentiment that this market is on fire in a good way. What makes this recent dip on the right hand side? As industry groups fall out of favor -an example is gold right now- it can pull this back. 100% of the charts I follow are not going to hit stride at the same time. So having this hover at a very high level is ok, but don’t expect 100%. Don’t worry too much about the wobbles at a higher level either. It usually means we will still make higher highs. I get more defensive when this falls below 75%.

The bottom line is the markets are hoping the healthcare systems can absorb the high number of cases now, and when the vaccine arrives, we should be able to get back to an economy and lifestyle we remember. This euphoria is in place due to fund managers investing for the future, and the future is brighter than it was at the beginning of the month. The momentum and the other indicators we use at will tell us when to be more careful. Until then, I want to enjoy the strong market dynamics. While we may wobble, much like the Nasdaq has been doing for a couple of weeks, we have not faltered. This week marked a resurgent Nasdaq, while the other cyclical sectors also found buyers showing up. We closed with $SPX markets at new highs in the USA. We  are not in a bear market, when we are hitting new highs. This market is on fire and we just hit new highs this week. If you would like to be kept up to date on market changes, consider this.

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Good trading,
Greg Schnell, CMT, MFTA.