It was a close call, but Santa finally delivered with a strong rally this past week, pushing the markets to all-time highs. Interestingly, despite the “Blue Sweep” of the Georgia elections, the markets quickly turned from worrying that such would be harmful to the markets. Markets quickly dismissed concerns of higher taxes by justifying it with more stimulus and more significant deficits. In other words, “buy everything in sight.”

As I tweeted out on Tuesday:

Here is my prediction of how the market reacts tomorrow.
- Dem's win...market up.
- Rep's win...market up.
- Split win...market up

It really doesn't matter because they are all the same. Regardless of who wins inequality will wide, and economy will weaken. pic.twitter.com/tdR2Bu19Jq

— Lance Roberts (@LanceRoberts) January 6, 2021

While I do jest a bit, market participants quickly justify paying continually higher prices for investments.

Why not? Mainly when it’s a “Heads I win, Tails I win” market.

As I noted last week, it certainly seems as if there is no “risk” in investing. As markets continue to rise, investors are becoming increasingly confident. But therein lies the risk as confidence breeds complacency. 

In the short-term, the bullish trends remain intact. After a month-long choppy process, the S&P 500 finally set a new all-time high. The good news is that short-term MACD signals and money flows are favorable, suggesting prices could rise higher in the short-term.

However, notice that while the MACD, and money flow, are positive, the market remains significantly overbought short-term. Such suggests that while markets could rise, it could be somewhat limited return relative to the risk.

On a longer-term basis, the markets remain grossly extended from long-term means. The only other times we have seen these extensions in recent years often resulted in the loss of short-term gains rather quickly.

A correction within the next 2-months would not be surprising given the deviations from long-term means. However, such does not preclude more upside first.

The Risk Of The Bullish View

As we noted last week:

“Currently, every single analyst has the same story going into 2021.

• Prepare for an economic boom.
• Interest rates will rise.
• Inflation is coming back.
• The stock market is going to 4100-4500
• Small-caps are the new ‘new trade.'”

You get the idea. Everyone is incredibly “bullish” about the coming year with hopes of more stimulus, infrastructure spending, and a vaccine.

Somehow, despite millions of people still unemployed, the economy has just shifted into a “Golden Age” not seen since the 1950s.

However, therein lies the problem.

We Can’t Go Back