Is it Crash Helmet Time???

For the past three weeks, my message has been one of a little short-term concern against the backdrop of much higher prices to follow. That remains unchanged. Market sentiment had become frothy, meaning that too many people had become too confident in the stock market. We saw that in both the individual investor and newsletter writer sentiment surveys. Options traders were betting overwhelmingly on higher prices over the short-term. Corporate insiders were selling much more than they were buying. Traders using the Rydex mutual funds had become heavily invested on the “risk on” side. The short-term trading or ARMS index showed excessive buying pressure.

Combined together, we had stock market sentiment at potentially bull market killing levels. However, excessively bullish sentiment has never single handedly killed a bull market. There needs to be a poor monetary and/or valuation landscape as well, which we do not have today. So let’s not even begin the discussion about the bull market being over. I know I am beginning to play with fire as I have said that during every single pullback since 2012 began, but I continue to feel the same way today.

Anyway, the pullback is here. It looks and feels nasty. The bears are coming out of the woodwork calling for a bear market, a 20% decline, even the 10% correction. As always, I could be wrong, but I view this bout of weakness as yet another single digit pullback that can be bought and will lead to fresh all-time highs next quarter.

Yes, sentiment was really bad, but go back and reread my two pieces on Canaries in the Coal Mine. The big picture did not look unhealthy a few weeks ago and certainly does not today. The market was due for some cleansing and the job is getting done now. Stocks should begin to probe for a low shortly between current levels and 4% lower. Technical damage has been relatively mild so far and it’s time to make our shopping list.

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