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Data Source: AAII

Last week I said, "Until the bears fully capitulate, the market can keep climbing..."

This has never been truer than this week. The reason this rally is so hated is that institutional managers came into June Overweight Cash and Bonds and Underweight Stocks. Here is BAML's survey of $600B AUM across managers they surveyed at the end of May:

The bounce was so abrupt that they could not catch it and spent most of June and July "waiting" to buy a dip that never came or in many cases staying short/re-shorting as the market moved higher.

As the sentiment Survey results show this week, even as we continue to make new highs, the bears have not capitulated and the bulls are still scared.

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Bullish Percent dropped back down to 31.74% this week while Bearish Percent rose to 32.02% (~4% move on each side). What is valuable about this data is the fact that we did not come close to a euphoric peak on each read before backing off.The implication: the "PAIN TRADE" is still up.

The "PAIN TRADE" is defined as the move in markets that will cause the most pain to the most participants based on their current positioning (catching people offsides). What is unique about this situation is that many managers underperformed in 2018 due to a Christmas surprise from Fed Chair Powell. The market took off without them in January and never really gave them a chance to catch up to the benchmark in 2019. Just as they started to get exposure in March and April the rug was pulled out from under them in May and most said: "Fool Me Once..."

Now, they face the burden of career risk being at a 7-year high allocation to bonds and unwilling to buy equities back at/near new highs - which is EXACTLY the fuel the market needs for the next leg up. The higher we edge up the more and more skeptical money will be FORCED back into the market for fear of career risk. They will come kicking and screaming with backward-looking data that says "multiples are too high and we are at the end of the cycle" but they will be forced IN to keep their jobs. Once the boat is full again, the trap door can open to abruptly let everyone out without notice, but we are not there yet.

Last week - as we started to approach the Central Bank meetings around the world (this week and next) it was becoming a little worrisome that Bullish Percent had been ticking up. It had moved up to 35.93% last week, and I was somewhat concerned that it would potentially tick up to 40% plus (at/near euphoric read) going INTO the Fed meeting next week. That would not have been a great setup. With skepticism increasing into such a critical meeting the setup is better for the overall market as the "news" will be delivered with money having to go INTO the market versus already being exposed (i.e. "sell the news").

The shorter-term CNN "Fear &Greed" Index is still at a subdued read of 57 which gives us plenty of runway to a euphoric 80+ reading we would need to see to start to want to consider locking in profits/lightening up after this run.

Over the next week, we'll hear from the ECB, BoJ and the Fed.The fact that managers are coming into these key events skeptical and underweight equities bodes well for more gains in coming weeks.

As with all indicators, they are to be used as a barometer, not a crystal ball.No one indicator should be used in isolation and it is always imperative to manage risk. Although the data and probabilities favor a particular outcome over a series of trades, one can never be certain on just one sample event.