As Bullish As Bullish Gets, The Philosophical Foundation Of Contrarianism

I have never seen breadth and sentiment as bullish as they currently are. Let’s start with breadth. According to a chart by David Keller, 92% of S&P components were above their 200 DMAs at 7:19am PST Friday morning (Chart Source: David Keller CMT Twitter, Friday December 18 7:19am PST). If we do the math, that means ~460 S&P stocks were above their 200 DMA and only ~40 below it. That’s some strong breadth.

Turning to sentiment, let’s start with “The Biggest Consensus In History” (“The Biggest Consensus In History”, Top Gun Financial, Saturday December 19, Section 1). Investors are almost unanimous in their belief that 2021 will be a great year for stocks based on the COVID vaccines, economic reopening and normalization, That is the narrative driving stock prices since Pfizer’s vaccine announcement Monday November 9. You can see it in strategists rush to raise their 2021 S&P price targets in recent weeks (Chart Source: Sentimentrader, “Wall Streets looks set to party in ’21”, Friday December 18).

Next, in their monthly Fund Manager Survey, Bank of America found that fund managers were underweight cash for the first time since 2013 (Chart Source: “Investors Are Underweight Cash, First Time Since 2013”, JC Parets, Friday December 18).

To Parets, this is bullish because it’s exactly what we saw at the beginning of the last two bull markets in Jan 2002 and October 2009:

So what’s that mean to us?

Well, as BofA points out here “this behavior is indicative of an early-stage recovery similar to recoveries after the GFC (Oct ’09) and the dot com bubble (Jan ’02)”.

It’s similar to all the breadth thrusts we’re seeing in the indexes, they typically come near the beginning of cyclical bull markets, not near the end of them.

Add this one to the list.

However, that’s not the conclusion drawn by BofA’s Chief Investment Strategist Michael Hartnett who said that this low level of cash is a sell signal that typically leads to a 3.2% correction in the S&P over the next month. “Sell the vaccine 1Q21”, Hartnett concluded (“Fund Manager Cash Hits 4% (BofA)”, Top Gun Financial, Wednesday December 16, Section 3).

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