Irrational Exuberance – The Bulls Remain In Control

Irrational Exuberance Bulls, Irrational Exuberance – The Bulls Remain In Control 12-11-20

Over the past couple of weeks, we have talked about a short-term correction potential due to selling pressure from annual mutual fund distributions. We saw that taking place this past week with the market struggling to maintain its breakout levels. 

The good news is the “bullish bias,” or rather momentum, of the market was strong enough to offset the selling pressure. Notably, the market held support at the recent breakout levels.

The not-so-good news is the markets remain significantly extended and deviated from means, and the bullish sentiment is very lopsided. Furthermore, the MACD signal has triggered a short-term “sell signal.” Such setups have often been coincident with more important short-term corrections. 

Nonetheless, we could get a bit more weakness into next week as year-end “options expiration” occurs on Friday. With the heavily skewed “put-call” ratio currently, we could see volatility pick up as options traders roll positions over into 2021, or selling occurs to take “tax losses” for 2020.

Such could provide a reasonable trading entry for a post-Christmas “Santa Claus” rally as portfolio managers add holdings to “window-dress” portfolios for year-end reporting. 

However, once we get into 2021, much will depend on getting a stimulus package passed and the vaccine delivered. If either of those fails to occur promptly, or the economy slips back into recession, the downside risk increases. 

That is a story for next year. For now, it is all about the “Santa Claus” rally and our year-end price target for the market. 

 

Approaching 3750 Target

In August, I laid out a target for 3750 for the S&P 500 by year-end.

“Technical analysis works well when there are defined “knowns” such as a previous top (resistance) or bottom (support) from which to build analysis. However, when markets break out to new highs, it becomes much more of a ‘wild @$$ guess’ or ‘WAG.’

That target was derived when I previously set out several “risk/reward ranges.”

“With the markets closing just at all-time highs, we can only guess where the next market peak will be. Therefore, to gauge risk and reward ranges, we have set targets at 3500, 3750, and 4000.”

I have updated the chart below. The “black arrow” was where I initially did the analysis.

Since that point, the market spent a couple of months making very little headway. However, as noted in “Market Surges As Election Turns Into Optimal Outcome:”

“It was quite the reversal. The rally pushed the market back above the 50-dma and the downtrend of lower highs. Such sets the market up for a retest of all-time highs next week.”

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